Oh Canada?

Oh Canada?

I listened to President Obama’s 2011 State of the Union Address last evening and last week attended the Venture North 2011 conference in New York City hosted by The Hatchery and the Canadian Trade Commissioner Service.  Canada may be the belle of the ball in North America today. 

In North America, I believe the news out of Mexico continues to deteriorate.  Although the government indicates that everything is under control, drug related gang mass murders are a regular occurrence.  Mexico is not quite yet overrun by drug cartels.  The government has not quite yet let institutions and infrastructure fray and crumble to the point beyond which the current ruling bodies can no longer maintain order and civility.  Nevertheless, it appears to me that the government has stifled innovation in part due to onerous legislation, poor education and some of the highest broadband pricing in the world.  Thus, companies are not creating enough new jobs for Mexican workers.  And so the US continues to see an influx of immigrants from the south even when job growth in America is tepid at best.  I don’t believe that we will see martial law in Mexico in 2011, but the chance that something like this might transpire during the year would no longer be in low single digit percentages in my opinion. 

Last night President Obama delivered the State of the Union address.  We are clearly not in great shape north of the Mexican border; nor are we in Mexico’s parlous state.  Last evening, the President appeared to be channeling James Carville -- “It’s the economy, stupid” -- and focused on domestic issues related to sparking job creation by fostering innovation and encouraging new industries.  The problem is that unfortunately we have spent a great deal of money already and really don’t have the resources to enact the programs that he is proposing.  We probably should already have initiated these programs with our prior stimulus money if we were going to do them.  The President will need to be a tremendously good salesman to get Republicans in the house to buy into his complete vision from this  point forward.

New, high quality, high paying jobs would be a great benefit to American society, but such investment takes a long time to pay off as it did with the space program in the 1960s.  The President made allusions to the specter of Sputnik.  I heard many noble ideas in the address: providing widespread broadband Internet access, increased spending on basic research, energy technologies, and education, and cuts in marginal corporate tax rates.  The problem remains how to pay for all of these programs from the position we are in today – a time of record deficits that are only going to grow larger by the end of the decade. [As an aside, I agree with the President’s sentiment that returning immigrants to their country of origin after we have paid for their post-secondary education in the US only to have them compete with our companies is the height of insanity.]

I will leave for another day the topic of taxpayers subsidizing the creation of intellectual property for which they may not see much benefit.  I am not necessarily referring to failed research and development which will inevitably happen, but something far more sinister that is happening today.  Assuming the public and private sectors work collaboratively as President Obama envisioned in his address, I am still concerned with investments in this area.  Where will our next innovations come from when Chinese companies are systematically appropriating our companies’ intellectual property as part of “agreements” to have access to the Chinese market?  Or what happens if these innovations are simply taken via corporate espionage?  What is the incentive to create if you cannot monetize the intellectual property?  The taxpayer certainly doesn’t receive any future taxes from an American company that has licensed intellectual property that doesn’t earn any money.

Although many Republican and Democratic house and senate members sat together for the address to demonstrate a new bipartisanship, President Obama was correct in stating, “What comes of this moment will be determined not by whether we can sit together tonight, but whether we can work together tomorrow.”  I do not have confidence that our political parties will come together to solve the huge problems facing our nation.  I hope to be proved wrong, however.

The reason I do not have much faith in cooperation is the need for some taxpayers to bear some pain.  This pain will not be born equally.  There is no solution to the Federal spending problem without tackling entitlements (Social Security, Medicare, Medicaid) and Defense.  That is where all the money is.  And there is no way to lower marginal tax rates and become more competitive globally without giving up beloved deductions such as the mortgage interest one because there too is where all the money is.  Our politicians have to make the hard choices.  If the politicians are honest with themselves, (and it’s high time they are honest with the American people; we can actually handle the truth), then the only real issues to argue about are how deep do we need to go with spending cuts and what is a “fair” phase-in period for these cuts so that we do not totally disrupt the lives of those who have planned their lives and retirements around these entitlement programs.   Freezing domestic spending, which represents 12 percent of the annual Federal budget, will not solve our structural problems.

So this brings me to the position of why I think Canada is looking pretty good on a relative basis.  Although countries across the globe took hits during the financial crisis, Canada is one of the few that has emerged relatively unscathed.  The Canadian Government and its central bank did not bail out its banking institutions.  They didn’t have to do so.  Its economy, still heavily supported by commodities, energy and basic materials produces goods and services that its citizens and other countries actually need.

Moreover, Canada does not have the sub-prime mortgage problem that we have in the US.  In Canada, all mortgages with less than a 20 percent down payment must be insured.  Canadians have few adjustable-rate and interest-only mortgages.  This conservatism has created a situation where only about one percent of Canadian mortgages are currently in default whereas ten percent or so are in distress in the US, yet home ownership rates are virtually identical in both countries.  Who needs the bells and whistles that add no value? 

Today, Canada’s banks can actually lend money to its businesses.  Heck, Canadian banks are currently lending to my own portfolio companies in the United States at better rates than we can obtain from US banks so they are taking business away from US banks right now. 

The Canadian dollar has gone through parity and is now worth more than the US dollar.  In contrast to the US Federal Reserve, Canada’s central bank maintains an accommodative position on monetary policy with a 1% rate, but is not running the printing presses and growing its balance sheet with quantitative easing.  Indeed, according to the Bank of Canada, “(g)rowth in the broader M2++ aggregate remains below its historical average, suggesting subdued inflation pressures ahead.”  I wish we could say the same in the US!

In Canada, the citizens still control their own government and vote (at least 59% of them do so) and haven’t yet handed over autonomy to lobbyists and corporations.  Their parties may actually be able to work together and cooperate to get something done.  To a certain extent, one has to be able to cooperate somewhat in most parliamentary systems unless one’s party has a supermajority.

I witnessed a solid amount of optimism at Venture North 2011.  There are certainly a number of problems with smaller Canadian firms.  But the economic climate and the growth opportunities appeared very favorable and the weather in Toronto or Montreal is certainly no different from what we are experiencing this winter in New York City!  In fact, the business climate in Canada appears very clement today and for the future.  Government investment and development programs abound.  Low interest rate loans, forgivable loans and outright grants are obtainable from government sources.  And Canada’s top marginal corporate tax rate is even lower than Mexico’s and is solidly lower than our own here in America. The Prime Minister of Canada, Stephen Harper, gave a speech in September 2009 regarding how Canada survived the recession.  He talks about cutting taxes while maintaining a balanced budget.  The Prime Minister discusses his country’s enormous energy resources and commitment to clean energy for the future.  He emphasizes Canada’s stimulus spending focused on long-term infrastructure investments in highways, ports, bridges, universities and colleges, scientific and technological research and development -- the critical economic architecture of Canada's future prosperity.  He could make those investments because Canada’s budget was in surplus when the recession began.  I wonder if President Obama’s speechwriters took at a look at this speech before composing the State of the Union address?  The President was far more eloquent certainly, but the Prime Minister is sitting in a much better position today.

We should not be like the creators of South Park who want to “Blame Canada” for all of society’s woes.  As a patriotic American, I may not be ready to embrace all aspects of the Great White North, but Canada looks pretty good to me today.

The Future of Bowling Alone Together

My friend, Tom Shannon, has recently opened, Bowlmor Times Square, a gargantuan entertainment complex that I hope will be a hugely successful investment for him.  I think it will be.  Tom has captured and encapsulated the spirit of New York in his Times Square homage to the city.  He has divided his bowling lanes among a series of lounges – with different lounge themes to represent iconic places and times unique to New York City such as Times Square in the 1970s, Chinatown, Central Park, 1930s Art Deco, 1920s Prohibition, Pop Art and Coney Island.  It is a place where city dwellers and tourists alike can escape for a few hours and in the words of Robert Putnam, they are free to "bowl alone."  It seems ironic, but they bowl alone together.  In New York, Times Square seems to be the ideal place to be alone together.  Think New Year’s Eve….

Robert Putnam wrote a book entitled Bowling Alone about the collapse of social cohesion and civic engagement in the United States.  According to Putnam, more Americans than ever before are bowling, but they are not bowling with and against their friends in regular leagues.  I don’t think that Bowlmor is really going to promote leagues and encourage civic engagement, but I have no insight into their actual plans.  And I don’t wish to disparage what Bowlmor is doing in any way at all.  In fact, trying to recapture the past and recreate civic engagement and league competition on a grand scale would be a grand business failure in my opinion.  As I see it, Bowlmor is a more grown-up version of the Disneyfication of Times Square.  The business has the potential to draw in the tourist, corporate entertainment and nuclear family party trade and this is why I believe it has the potential to be a very successful operation.   

Bowlmor in Times Square is an entertainment experience that is compelling enough to get people out of the comfort of their homes to enjoy it.  Bolwmor is event driven.  The tourists, the corporate party planners, the birthday party planners and younger finance and new media workers looking to get of their cubicles and apartments for a spell will find the entertainment value proposition compelling.

Bowlmor Times Square may translate outside of Manhattan as well.  As it changes geographies, it would probably need to change themes, but the concepts remain viable.  As more and more of our time is spent at work and with our nuclear families, less and less time is available for community, religious, social and extended family activities.  As two income households travel and commute greater distances for work and have children who do the same for a variety of activities as well, there is little time and energy left for all other activities.  A generation or two ago, parents may have participated on a host of committees in their local communities.  Today, perhaps it is participation on one or two committees if they are fortunate.  For whatever time that is left, families will try not to waste it.   If they choose entertainment options, they increasingly look for meaningful entertainment value.  Such activities need to be special to draw people away from the Internet, flat screen TVs and Xbox 360 Kinect systems.  With each passing year, it becomes harder to compete with options that are available at home.  And so we “bowl alone,” but increasingly in our own living rooms with our Xbox 360 Kinect.  To bowl alone together, the experience must be exceptional.

Fighting the Last War

When time horizons between events are very long, it is very easy to fall into the trap of fighting the last war.  I read a  New York Times Article over the weekend and it reminded me of a conversation that I had with my father when I was a college student many years ago. 

I was trying to figure out what to do with my life and my father (a lawyer) suggested law school.  No surprise there.  He said "Law School offers the maximum amount of opportunity with the minimum amount of commitment."  I bought this argument at the time, but I didn't realize my father was fighting the last war -- in his case almost literally and figuratively.   His statement was perhaps true for a generation trying to escape serving in Vietnam and for a generation for whom very little debt was needed to pay for law school tuition.  My family could still afford to pay for law school when I went, but it was not cheap.  Today, my alma mater (Yale Law School) is still an outstanding institution, but the opportunity cost of foregone earnings for three years is high and tuition, room and board at more than $70,000 per year is not an obligation to be taken lightly.  In fact, it is overwhelming to all but the very wealthiest Americans and is why the vast majority of its students receive some form of financial aid.  Although the Yale Law School is a wonderful institution, it is not as exceptional as it could be regarding costs and financial aid.  Law school students throughout the United States must finance their educations primarily through a combination of significant loans and grants and these schools are on the whole quite expensive.

And this is really the crux of the New York Times article -- "there is no shortage of 22-year-olds who think that law school is the perfect place to wait out a lousy economy and the gasoline that fuels this system — federally backed student loans — is still widely available."  These students are fighting the last war and listening to my father's advice and they are playing with other people's money.  

Our society needs top notch attorneys, but we certainly do not need as many transaction costs and as much deadweight economic loss and friction as we have in our economy.  We need greater -- not less -- efficiency and better, more efficient counsel.  And so, we need more highly skilled (and trained) and more technologically savvy attorneys who can leverage their staff and resources more effectively.  Unfortunately for many law school graduates, the trend is toward fewer bodies thrown at legal matters and these legal minds need to be more quick and effective at finding solutions.  My father could not have known that the market for legal talent would become increasingly competitive and global when he made his comments to me so many years ago. 

For top tier academic institutions, I think the current environment presents a tremendous opportunity to revamp pedagogy and outdated curricula and help form very highly qualified and credentialed professionals able to make clients more effective and efficient across the globe.  These graduates can help resolve disputes in a more expedited (and one hopes eventually more just) manner as well.  Nevertheless, the overall demand for law school graduates will probably not be as high as it was in the recent past and many tasks today performed by associates will increasingly be performed by technology and paralegals.  The current economic downturn is only accelerating this transition.  For many law schools that are not highly competitive, I feel it will be very difficult for their students to see a return on the investments that they have made in their educations.  We simply will not need as many attorneys to do the same types of tasks as they performed in the past.  Law School no longer offers the maximum amount of opportunity with the minimum amount of commitment.

Are Our Schools Running Out Of Money? Are Our Town’s Running Out Of Money As Well?

Over the holidays, I discussed this topic at the dinner table with my father-in-law.  My daughter recently asked me this question as a follow up to our dinner discussion.  I serve on our town’s (Bedford, NY) local school board and on the board’s finance committee so it is not an odd topic to address, but it is not an easy one to grapple with either.  I should mention that all of the opinions expressed here are my own and do not necessarily reflect those of any other board member of the Bedford Central School District or its Administration.  At some later date, I may post a speech that I gave on the difficulties posed by one of the district's employment contracts that I gave during one of our board meetings.  That speech is related to this topic.

Obviously, not all school districts and towns are in the same financial position.  I don't think I can lump them all together, but there are some generalizations that I can make -- especially about the districts and towns in the State of New York.  They are not in good shape.  For example, Westchester County in New York pays the highest property taxes in the country.  Nevertheless, our district must currently dip into its reserves to keep its taxes from increasing too much too quickly to meet the obligations of its operating budget.  This is a perilous situation. 

According to the way my daughter would think about the question posed above, our schools can make payroll and pay interest on our debts so they are not running out of money today.  Schools will open tomorrow unless there is a snow day.  My children are probably hoping for one!  The problem is that our district has incurred obligations for the future that we will not be able to match with tax revenues or other sources of income from future years.  Many other districts in New York and in several other states are in the same position.  We have a balance sheet of cash reserves set aside for a rainy day, but once those reserves are exhausted and once we have let go of all employees whom we can (even though it will be painful to do so), we will no longer have other choices.  At that point, our district, and many others like ours, will not be able to pay the bills without a drastic change. 

In our district, we have Federal and State mandates and contracts that require our district to provide minimum levels of educational services that we cannot go below.  We have polled our taxpayers and know their pain threshold for tax payments as well.  We vote on our budget every year and set our tax rates for the coming year.  At some point within the next few years (perhaps less than 5), our district (and many others like it) will not technically run out of money and default on its debts, but may indeed run out of its ability to collect any higher taxes or find other revenue sources in the face of spending obligations and may have to restructure itself in some manner – by consolidation or overhaul at the state level if budgets cannot get passed.  Neither outcome may be particularly pretty – especially if done out of necessity and under time pressures.

I would not count myself in the Meredith Whitney camp that believes that the Federal Government will need to bail out several states, counties, districts and municipalities in 2011 because they will not be able to service their debts. 

I confess I have not read Ms. Whitney’s 600-page report on the topic because I am not one of her firm’s clients and so may not be doing her justice, but I do not see a short term widespread municipal debt crisis in the United States.  For our school district and for most municipal entities, debt service is a relatively small part of the budget – generally in the low single digital percentages.  I concede that defaults will occur in 2011, but they will not be large scale and ubiquitous.  And even if our country were to experience a very nasty double dip due to a serious second downturn in housing prices (and this scenario combined with another downturn in employment are about the only scenarios other than an exogenous disaster that I can envision that would trigger large numbers of defaults), the Federal Reserve could buy short term obligations and municipalities could roll over their debts for some time.

Federal Reserve purchases do not solve the long term problems that our country faces, however.  We have incurred obligations (primarily to public sector employees) that we cannot afford to pay back with tax burdens that we can sustain.  Buying new bonds and enabling entities to make interest payments on old ones so they do not default is exactly the same alchemy of Quantitative Easing that will take this country to a painful place over the long run as well.  Nevertheless, it will avoid the short term issue of a Congressional bailout vote if that were to become necessary, but I don’t think the state and local debt issue will rise to that level in 2011.  Still, the issue is not going away and Governors Christie and Cuomo are right to try to tackle the issues driving the debt crises at the state and local levels before they explode in the coming years.  Let us hope we come together and solve the problems before they swallow us and we really do run out of money in exactly the way my daughter would envision it....

New Year, New Blog, New Post

In 2011 I have no illusion that the world needs another blogger.  I only hope that the weekly task that in the future I will set myself to will on occasion entertain, amuse, provoke or in some way invigorate readers.  If so, I will have succeeded in more than a demonstration of vanity.

I plan to cover a wide variety of topics and to pursue a myriad of interests.  This blog may wind up very eclectic or pursue threads with a few themes.  I do not know today whether I plan to focus more on work interests, community service interests, or life and personal interests.

I will be as open and intellectually honest as possible, but will not disclose information when I have a legal and fiduciary duty not to do so. 

Why did I use the name "Forgotten Door" for the title?  Well, the URL was available on Blogger and I was looking for a phrase that connoted a fresh start that led to an entirely new world and suggested new ways of thinking that were perhaps hidden from plain sight.  Someone had taken "The Secret Garden" and so I improvised.  Perhaps there are fresh starts and new ways of thinking about many of the problems that face the United States, various state and local governments, large and small companies, and extended and nuclear families?  Perhaps I have just not yet stumbled upon these "Forgotten Doors" and opened them up?  With any luck, on this journey I just might find a door or two....

Most importantly, I plan to have some fun with this blog!