The Chinese proverb “may you live in interesting times” has been particularly true during the past few years. Harken back to November, 2007 and the DJIA (Dow Jones Industrial Average) which peaked the prior month began its precipitous 50% decline and by November 2008, the world economy was on the brink of collapse. This November as we prepare for the Thanksgiving weekend the DJIA has gained 72% since its nadir and we celebrate the passing of the mid-term elections.
Thanksgiving typically conjures up images of prosperity and overindulgence. Seldom do we reflect on the Pilgrims challenges. When we think things are bad today, let this serve as a reminder of the perseverance, risk and sacrifice our forefathers undertook in pursuit of opportunity. Recall, the Pilgrims were fleeing religious persecution in their native England and journeyed to the New World for the chance of a better life. Following protracted negotiations, the trip was financed by a group of English capitalists, the Merchant Adventurers, who agreed the Pilgrims would be given passage and supplies in exchange for their working for their backers for 7 years. On Sept. 6, 1620 these latter day entrepreneurs set sail. The 65 day trip was miserable with many passengers falling ill before arriving. Their first winter in the New World was devastating as the weather was exceptionally brutal. Indeed, of the 110 people who left England, fewer than 50 survived the first winter.
The Pilgrims’ story is reflective of millions of immigrants over several centuries who, despite horrific odds, left native lands in pursuit of a better life with no promises of income let alone guarantees of survival. It should also serve as a reminder of spirit and culture they instilled in our county which provided for its rapid economic rise.
Fast forward nearly 400 years to today, and despite considerable problems, the United States still represents a land of freedom and opportunity rewarding individual initiative and risk taking for those able and so inclined. The United States has many assets including outstanding academic institutions; a commercial legal structure which encourages business formation; clusters of innovation married with venture capital to spawn new industries; and outstanding medical systems. Unfortunately, over the past seventy years longer life expectancies, political forces, extensive social programs, and an undereducated segment of society have conspired to create liabilities on our system that are unsustainable. Simultaneously, technology and globalization have converged to systemically eliminate the need for many jobs and thus has created a new base level of unemployment.
The 2010 elections recently concluded, with a balance of bipartisan power (perhaps gridlock) being restored to our country. The populous spoke, out of frustration, with a zero confidence vote on the country’s direction. No doubt we face some significant challenges. Years of overspending and overpromising at the personal, state and federal level has created a mess. Personal consumption over the past decade outpaced income thanks to the abundance of mortgage backed credit fueling personal consumption that otherwise wouldn’t have existed. Our ongoing entitlement programs have contributed to budget deficits and our state and private defined benefit plans are underfunded.
Unfortunately, the medicine the country needs represents political suicide for our elected officials. The United States fiscal 2010 budget highlights so called mandatory expenditures (e.g., Social Security, Medicare and Medicaid, unemployment benefits, welfare, defense spending, interest on our debt) exceed total government receipts. Accordingly, without tackling entitlement programs it’s nearly impossible to reign in government spending. This isn’t a unique problem for the United States. In fact, two weeks ago the British government announced austerity measures which include raising the retirement age to 66 and cuts in other entitlement programs. Likewise similar austerity measures are underway in France with a proposed state pension reform. Without a modification to entitlement programs there will be no reduction in government spending. There are only two other ways to fix our deficit problem: raise taxes or print money, neither of which is palatable. Raising taxes has the undesirable effect of reallocating capital from the private sector, where otherwise it would be deployed to stimulate business investment and employment. Printing money either literally or through monetary policy leads to higher inflation, a hidden tax on our population and puts the U.S. currency at risk and raises borrowing costs, another drain on the economy.
With respect to unemployment, our displaced workers need to deal with the elimination of jobs that have been outsourced or replaced by advances in technology. As Tom Friedman articulated, in the “World is Flat: a brief history of the 21st century” the challenges and opportunities for businesses in the 21st century are immense. Even for small cap companies, there are global opportunities. Rooted in Cleveland, Ohio the industrial rustbelt we are particularly aware of both challenges and opportunities. As a MicroCap private equity firm, we are always sensitive to the inherent risk or opportunity of global competition. Unlike businesses however, individuals don’t have the luxury of going global. The dire reality is many unemployed will need to retool and develop skills that are in demand or accept the prospect of a lower wage and living standard. For the next generation we need to improve our primary education system and incentivize our students to pursue the sciences. Moreover, we need to revisit our immigration policies to retain those foreign talented science and engineering students who populate our universities.
Our Country is at a crossroad. We need smaller government, realistically affordable pensions and entitlements, elimination of waste in our medical delivery system, more favorable tax treatment for businesses and an educated workforce capable of competing in the 21st Century. Through history, we have persevered through plagues, world wars, a great depression and other crises. As we head into the next decade, tough choices both personally and politically need to be made to ensure our country’s prosperity going forward. As Mark Twain once stated, “don’t go around complaining the world owes you a living, it owes you nothing. It was here first”.