Category Archives: Public Policy

Mad at Pakistan?

Americans are mad at Pakistan.  Last night, Jon Stewart showed a clip of Fareed Zakaria asking if Pakistan is complicit in hiding Osama Bin Laden – or just incompetent.

Do you blame Pakistan for bin Laden living there?  Do you think our relationship with their government should be strained by this?   Should we reduce support?  Sanction trade?

No.  That’s wrong.  Here’s why:

Pakistan is not one thing and their government is not monolithic.  There are many power structures in Pakistan.  You shouldn’t blame “the government” for sectarian separatists, terrorists, or others who secretly hide within their borders.  Thinking that way is like blaming a person when their body grows a cancer.

Did we blame the American Government when Timmothy Mcveigh was a terrorist in Oklahoma City?  No.  America was a victim.  And Pakistan is the victim now.  Pakistan has been in a complex civil war with multiple armies of radical extremists for many years.  Some of them are politicians trying to consolidate power with secret affiliations, others attack India trying to incite a broader war, others hide like rats.  Pakistan is suffering from these cancers.

We should be offering tax incentives to increase trade with Pakistan, increase aid, and increase support for democratic stability, secular and academic institutions, and human rights.   Economic sanctions and saber-rattling are counterproductive because they attack the commercial economy.  It would be better to empower the population through the commercial economy – enable them to overtake and stamp out radical separatists and would-be religious fascists.  Help them get on a path to become a productive and educated economy that has the power and will to suppress it’s own cancers.  Use economic levers to achieve better outcomes.

LinkedIn IPO: the Public Premium

Facebook has been leading a cult of companies avoiding IPOs.  The claim is that the cost of regulation and transparency is unnecessary and inefficient.  Private markets like Second Market have grown tremendously.  This may be all wrong, and let’s hope so.

The IPO of LinkedIn demonstrated a public premium: public markets offered a higher valuation than the private markets did.   Valuations can be higher because discount rates are lower.  Think about it: public investors get maybe 15% in a strong year.  Private Equity investors are organized around discount rates of 20% or higher.    If your discount rate is so high, future profits are simply not worth as much.

There is another important reason for a public premium: regulated standards of conduct and transparency.  When owners (shareholders) are more informed and confident, risk is reduced and value goes up.

The reason to hope this is the case is for the public good.  If IPOs and public listings are shown to be a rational — because the cost of compliance is less than the valuation premium — then more companies will be public and capitalism will be more broadly accessible. Also, this will lead to higher overall investment rates and stronger economic growth.

Net Neutrality: No Compromise

To begin talking about Net Neutrality, it helps to clarify what the internet is. It’s simply data sent via TCP/IP (the protocol for sending data through routers). Some people host web sites, others connect to their company e-mail, others do other things – it’s all the internet.

Understanding that the internet is just a connection using TCP/IP, then Net Neutrality is simple, too. Net Neutrality simply means that your ISP may not interfere with the internet. They may not censor your packets (the data that is sent via TCP/IP). This means they can’t censor your news, keep you off of Skype, restrict your sending and receiving, or otherwise interfere with your communications.

Any compromise on this is wrong for two reasons: 1) Your ISP should not have the right to interfere with your free speech, and 2) ISPs should not be able to tax the value creation of the media industry.

ISPs should not be able to interfere with consumer access to media companies, nor tax those companies for access to consumers. ISPs should not be able to interfere with our speech or block our access to the speech of others.

ISPs are in the business of providing internet access, but they don’t own the internet; any attempts to eliminate net neutrality would violate our consumer rights and hurt the economy.

Planning and Investing for the Long Term

2 Great articles quickly tell the story of global trends, risks, and strategies:

The 1st, by McKinsey & Company, focuses on Globalization’s critical imbalances:

Globalization’s critical imbalances

The 2nd, by Investors Insight, talks about how to use global macroeconomic issues like these in your investment decisions:
What’s the point of macro?

Reconsider the Stimulus

I am fed up with the structure of the stimulus plan.  Bailing out failed banks is foolish when tax credits for mortgage payments would cut the foreclosure rate and fix the toxic debt.  Why ignore this easy and super-efficient tactic?

If I could recommend a specific plan, it would be to provide tax credits for up to $30k/year in mortgage payments for primary residences for the next 2 years. This relatively cheap solution maintains free market capitalism with all the good incentives, and would dramatically reduce the foreclosure rate — particularly for those paying less than $30k/year for their mortgages. The plan could be extended or expanded if necessary, of course.

The result would be a reduction in mortgage defaults, an increase in the value of mortgage backed securities (MBSs), and a recovery of the financial strength of the lending institutions and pensions that hold MBSs. Essentially, this would repair the cause of the credit crisis rather than throwing money away at the symptoms and rewarding failure.

As soon as it is announced, assumptions about foreclosure rates would fall, raising the value of MBSs the same day.