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.