What's so free about the market?

In case any of you had any lingering suspicions that there actually exists anything close to a free market in the United States, that produces anything even resembling a level playing field for all participants (Giants and Lilliputians alike) think again. Here's a little excerpt from the Wall Street Journal article about General Motors that link goes to:

Now it turns out, according to documents filed with federal regulators, the revamping left the car maker with another boost as it prepares to return to the stock market. It won't have to pay $45.4 billion in taxes on future profits.

The tax benefit stems from so-called tax-loss carry-forwards and other provisions, which allow companies to use losses in prior years and costs related to pensions and other expenses to shield profits from U.S. taxes for up to 20 years. In GM's case, the losses stem from years prior to when GM entered bankruptcy.

Whether or not a "free market" could produce ideal circumstances for supply and demand to determine fair pricing on all things from wages to food (a suspect and highly debatable point even in the abstract), we may never know. Ideology, rage, and protest aside (all of which are in the ascension these days), there is no free market extant. Unless we work to mitigate the inequities in the system, meaning in clear language, remove the barriers to competition on the merits of a company's technology or services, rather than any number of pre-existing advantages, there is no high ground on either side of the debate.

I wonder if any of the changes in Washington will allow leaders to step up to the plate, swing, and crack the ball high and over the fence. Only time shall tell.

An Entrepreneur as Chief Economic Adviser

Today's Wall Street Journal (15 Oct 2010) prints an article by Elizabeth Williamson ("Obama Backs Away from CEO Search") on the pending replacement of Larry Summers as Director of the National Economic Council to the White House . There's been buzz lately that his replacement should be a corporate CEO, to smooth relations between the White House and the Business Community.

Here's my take: what we need is a successful (preferably bootstrap) entrepreneur, to advise the nation on how to lead our way to an entrepreneurial economy. Everyone is talking about jobs these days. We don't need jobs so much as we need businesses. Businesses start, and grow, and produce profuse amounts of jobs because entrepreneurs take advantage of opportunities.

They create far more jobs than all of those corporate behemoths combined. If the government has a role in this, it's simply to ease the path to those opportunities, it's to remove the corporate welfare that has created an unlevel playing field.

Let's stop holding on to the past; instead let's allow the failings of that old thinking to provide the opportunities for innovation!

Is VC a Degenerative Disease?

Here's a pithy quote from a recent WSJ Venture Capital Dispatch blog post:

Venture firms have now gone a full decade without collectively returning a dime, causing their investors like pension funds and university endowments to question whether the venture capital model even works.

Is there any reason that an entrepreneur with a cart full of ideas, excitement, passion, and motivation should pause, gesticulate, and faun over VCs to gain their attention and hope for their largess?

For my part, I'll stick to developing the winning ideas, figuring out a way to make it from napkin to market to profits, with or without the suits to back me up.

Taxes & Small Businesses

Arguing that the sunset of the previous administration's tax cuts for those earning more than $250k net will hurt small businesses & job creation seems a bit of a stretch. Here's a post on the subject on Growthology. Be sure to read the comments, in particular note the following remark: "Wouldn't the fact that pass through profits are taxed at a high rate encourage reinvestment? If we want businesses to hire then pulling money OUT of the business should be discouraged."

And here is a letter to the editor of the Wall Street Journal from this morning:

Your Sept. 3 op-ed "The Small Business Tax Hike and the 97% Fallacy" by Kevin A. Hassett and Alan D. Viard makes a misleading argument about small businesses in order to justify borrowing $700 billion to finance the extension of the Bush tax cuts for the wealthiest 2% of Americans.

Messrs. Hassett and Viard concede that 97% of small businesses will pay nothing more in taxes under the president's plan to allow the Bush high-income tax cuts to expire on schedule. Yet they argue that even if only 3% of small-business owners would be affected, this small fraction reports a large amount of what they term "small business" income.

The problem with their argument, however, is that it counts any type of partnership income, sole proprietor income, or S corporation income as small-business income. Thus, they count as small-business income profits that go to a partner at a major law firm or hedge fund. Our analysis indicates that small-business owners under this definition, who would be affected by allowing the top two rates to increase as scheduled, have an average gross income of over $1 million. Keeping the Bush tax cuts in place for these taxpayers would not likely result in additional job creation, and it would add significantly to federal budget deficits and debt.

The experience of tax policy over recent decades clearly demonstrates, and the Congressional Budget Office has confirmed, that tax cuts for the highest-income Americans—regardless of whether their earnings are classified as ordinary or small-business income—are not an efficient way to stimulate the economy or create jobs.

Michael F. Mundaca
Assistant Secretary of Treasury for Tax Policy
Treasury Department
Washington