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By Points and Figures (Reporter)
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Capital and Capitalism

Monday, November 28, 2016 8:55
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I subscribe to the Social+Capital snippets email.  They are generally great reads with really informative links.  As the country moved closer to the election, their emails got a little more political.  They didn’t lean left-they lurched left.  Cool with me and reading them keeps me from being in a bubble.  I received the Snippets this week and this is what the “homily” part of their snippet was.

“Somewhere along the way, a capital allocation decision was made along the following lines. Path A: I’m going to go build some random site where a bunch of dopes can update photos and waste a bunch of time; or Path B: I’m going to build an amazing new robotic infrastructure that will actually keep some of these manufacturing jobs in the United States. There was, theoretically, the ability to have that threshold of conversation. We didn’t do it. And everyone here in Silicon Valley in some way is complicit because we chose Path A. And we chose Path A because the economic incentives said ‘Wait a minute, if this thing works, all these hundreds of millions of people all around the world will, for free, be effectively our employees!’ In what universe could we ever build a business on the backs of 1.7 billion people and never pay them? That’s a fantastic business! And when you see the artifact of that success, everybody else follows suit. The capital flows that way. The intellectual capital flows that way. The human capital flows that way. The social capital flows that way. But then the artifact is basically a lot of people who say, wait a minute. That is not the compact I thought we had. So I do think there’s a conversation we have to have: how do we allocate our time and money in more productive, constructive ways? And if it means that our EBITDA margins are not 65% and they’re 40%, so be it. That may be the grand bargain of the 21st century. And my point is, who helps frame that conversation? Today that conversation isn’t possible to have. And as a result, what you have are literally fifty five million people left out on the sidelines. That is not right!

I thought that I was doing my job, and doing my best, until November 8th. And as a person who grew up in an economically really difficult situation, I look at a lot of those people as my people. And I feel like I completely let those people down. And here I am and I live my comfortable little life in my halcyon days, and I think to myself, My God, I’ve betrayed these people. These are my people.”

I don’t agree with Chamath’s assessment.  One of the things early on that you learn in business is to put the least amount of capital to work with the greatest expected outcome.  Labor is the #1 cost in any business, so if you can off load that cost or use less of it, that’s the choice.  People all make economic choices.

Professor Kevin Murphy at Chicago Booth likes to shock new students with a lecture on costs/opportunity costs.  He even talks about a “marriage market”.  People chuckle.  But, there truly is a marriage market.  Aren’t we seeing fringes of that market on Tinder, Bumble and all the other dating sites?

Democrats still think they lost because it’s about messaging and not policies.  They still believe in government to solve problems, not people.  They want to practice identity politics.  They still don’t understand how their candidate lost.

Hillary’s loss is not Silicon Valley’s fault.  Silicon Valley is out of touch with people.  They don’t think good ideas come out of other places and money doesn’t flow out of the valley to other places at Seed and Series A levels.  The Valley can be extremely condescending when it comes to other tech hubs in the US.

How many Midwestern entrepreneurs do I know that went to the Valley to raise money only to be told all kinds of excuses for not investing?  Gazillions. It’s really not worth the trip at seed and maybe even Series A.  Especially if you are trying to raise money for a business that isn’t core to the Valley’s DNA.

There are really cool ideas being worked on in all kinds of Midwestern cities.  You have to be on the ground there to see it.  From Minneapolis to Pittsburgh, to Omaha and Louisville, there are startup cultures happening that need some tender loving care-but mostly just capital.  Every Midwestern startup hub is starved for capital.  Only two hubs I know of have a lot of it, the Valley and New York.

Why did Silicon Valley build a bunch of apps that used free labor, and were seemingly meaningless to advancing society forward?  It doesn’t matter.  Everyone took some risk earned a pretty big return on investment.  Facebook created a lot of millionaires.  But, more importantly Facebook, Instagram, Twitter and other sites have created ancillary jobs that are very hard to quantify.

How many small businesses were able to create new customers that they wouldn’t have had simply by being on the platform and using their tools?  Hard to say.  It’s not that Silicon Valley invests in a lot of stupid stuff.  It’s that the things they have been investing in are hard to quantify when it comes to all the benefits.

Why did the Rust Belt vote strongly for Trump?  I have a pretty good view on this.  I think my view is better than Chamath’s because I grew up, live in, and have been all over the Rust Belt the last 8 years.  They are my people.  I am that person.  The policies Clinton espoused really sucked for the Rust Belt. Obama’s policies really sucked for them too.

When 25-30% of the American Federation of Teachers and National Education Association vote for Trump, Democrats should know it’s not their messaging.  Ronald Reagan’s statement applies.

The big one is Obamacare. It increased costs, limited access and did nothing it promised.  It’s one big huge government program and if there is anything the Rust Belt knows it’s government programs don’t work.  It has to be repealed.

Dodd-Frank sucked for them too. Even if you wanted to start a business, you couldn’t.  No access to capital.  Dodd-Frank has sucked for VCs too-along with Sarbanes-Oxley.  How do you get money back to LP’s when you can’t exit?  The massive expansion of the regulatory state when it comes to capital has crushed all businesses associated with it.

Sure, there are more micro VCs etc, but there aren’t more exits. Cash on cash is the best kind of return.  This has left fund of funds scratching their heads.  By the way, many of them won’t invest in the Midwest either-nor will they invest in Republicans.

Lots of manufacturing jobs have left.  Most won’t come back. But, Obama’s education policy sucks for the Rust Belt.  The children are stuck in bureaucratic public school systems that are guaranteed to fail them.   In addition, Obama’s energy policy and regulatory actions artificially raised the cost of energy.  Manufacturers would rather set up shop where energy is cheaper.

Obama’s corporate tax policy has been horrendous.  It forces jobs outside the country.  Lower corporate taxes to 15% and some of the capital will flood back in.  That will create opportunity, if you repeal Dodd-Frank and Sarbox.

Obama’s regulatory expansion strangled business. Not limiting it.  Choking it.  The opportunity costs are way too high.  The hurdle rates to do anything are significantly higher.  Want evidence?  The Federal Reserve has pursued a 0% interest rate policy since 2008.  No one wants capital for anything.

What’s my fear?  That the Trump administration worries about doing lots of stuff in the first 100 days.  There are certain things they should do and can do.  But, other things take some time to think through.  When government rushes, the taxpayers get hurt no matter who is in charge.

There is so much poorly designed public policy it’s impossible to get growth.  Growth means jobs.  A job means opportunity.  Men age 21-30 are working hourly jobs 10% less than they were.  Men over the age of 50, 15% less.  That’s massive.

In my hometown of Chicago, there is a $33.6 billion dollar public pension debt.  Other governments around the country are similar.  Do we think that government may have gotten too big?  Too cushy?

Government is just like entrenched corporations that use all their power to stop competition.  Except they have the power of government.  They have gerrymandered and put up barriers to entry.  Governments all over the US have limited competition in order to keep power.  See my home state of Illinois as an example.  At least with corporations we have a choice NOT to use them in most cases.  If I don’t like Google for search, I still have options.

How do we change it?  Let’s start by designing good public policy and taking the handcuffs off business.  Let’s bring back hyper-competition and make businesses earn it.


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