StrategyDriven Editorial Perspective – How to Respond to the Government’s Takeover of the Economy

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Recent government action ignited a new debate regarding the extent of Federal control over the marketplace. While some would collate the government’s degree of control to that of its spending, we believe this relationship to be inappropriate because purchasers exert indirect influence over an organization. Instead, we suggest the government’s direct control over an industry or organization stems from its majority ownership position or significant regulation of those groups. Therefore, we believe the Federal government controls approximately fifty-one percent of the nation’s economy as derived by its ownership and regulatory controls of:

  • U.S. Financial Industry – representing approximately 33 percent of the U.S. marketplace, the U.S. Government gained control through the Troubled Asset Relief Program (TARP) and separate bailouts of mortgage giants Fannie Mae and Freddie Mac.
  • U.S. Healthcare Industry – representing approximately 17 percent of the U.S. marketplace, the U.S. Government gained control through the passage of healthcare legislation in March 2010.
  • Other Major U.S. Businesses – representing approximately 1 percent of the U.S. marketplace, the U.S. Government gained control through bailout purchases of stock from companies such as General Motors and Chrysler.

“Now we have the federal government taking over ownership or control of 51 percent of the American economy.”

Michele Bachmann
U.S. Representative – Minnesota (R)

Why is all of this important?

The Federal Government has shown itself to be anything but a passive owner. After taking control of General Motors, the Federal Government expelled the CEO of that company.1 Similarly, the Federal Government has limited and in some cases reduced the compensation packages of the senior executives of those companies that have received financial bailouts.2, 3 Thus, the government and not the private marketplace is now dictating these business rewards.

Why should this be a concern for any business other than those directly involved?

Activist government participation in the marketplace suggests that politicians may take other actions to the benefit of those organizations the government owns. In fact, they already have. Aggressive attacks against a competing organization as was evident by the recent General Motors ad campaign specifically targeting its besieged competitor, Toyota, and the extensive public Congressional hearings involving Toyota executives over its cars’ sudden acceleration problem. None of Toyota’s other competitors waged ad campaigns specifically targeting the automaker nor was the government as publicly vocal when poor maintenance practices at one of its Tennessee Valley Authority coal plants created one of the worst environmental disasters in U.S. history on December 22, 2008.4

This past activism suggests politicians may be willing to aggressively seek to dictate terms to suppliers of its organizations; not only in the name of good business practice but for political reasons supporting those in government. Combined this with the fact that the Federal government exerts significant direct ownership and control over approximately fifty-one percent of the U.S. market and it becomes evident that government officials will influence a vast number of businesses within the United States.

StrategyDriven Recommended Practices

  • When at all possible, organizations should consider conducting their financial business with only those financial institutions not controlled by the U.S. Government, namely those organizations that have not received and do not appear to be at risk of receiving government bailout funds such that the government could the dictate the terms of their business operations. The goal is to minimize the organization’s exposure to government imposed stipulations associated with any borrowing that cannot be immediately paid back to avoid such stipulations.
  • Businesses should seek to diversify their portfolios such that they are not overly reliant on the sale of products and/or services to controlled organizations. The goal is to provide flexibility such that the organization could shift of cease business relationships with those government controlled organizations should unacceptable terms be demanded.
  • Businesses should factor in an additional risk if entering into the market of a government controlled organization. The goal is to account for the almost unlimited financial backing the Federal Government provides controlled organizations and its apparent willingness to use that funding to succeed in the marketplace.
  • Minimize consumption of government controlled organizational products. The goal is to minimize the risk exposure the organization faces should politicians seek to exert influence through the restriction of needed products or services. Additionally, this practice recognizes that government employees are typically better compensated than their private sector counterparts.5

In principle, these actions are not to suggest an organization not do business with the Federal Government, government controlled organizations or within government controlled industries. Rather, we suggest an organization not become overly reliant on the business transactions conducted with such entities in order to be able to resist government dictates over the organization’s business operations. Such standards, quantity, and pricing dictates do come from other large organizations such as Wal-Mart. Unlike these cases, however, politically motivated government officials are more likely to build in additional social program requirements as a part of their dictates thereby inflating a company’s overall costs and subsequently jeopardizing its ability to provide market competitive products and services to its other buyers. The only way to avoid such government intrusion is to ensure sufficient diversification exists in the organization’s financial support, supply chain, and customer base.

Final Notes…

StrategyDriven is aware that several reputable organizations such as FactCheck.org and CBS have refuted the notion that the Federal Government controls fifty-one percent of the U.S. economy.6, 7 All of these organizations base their position on the fact that annual government spending accounts for approximately twenty percent of GDP. We respectfully disagree.

A purchaser, even a major purchaser, of an organization’s products and services exerts an indirect influential control over an organization. The greater the percentage of an organization’s output that is purchased, the greater the force of indirect influence that can be exerted. While the Federal Government’s twenty percent of GDP purchasing power gives it significant marketplace influence, this is not the type of direct control referenced in the assertion that the governments owns or controls fifty-one percent of the U.S. economy.

Direct control is very different. With direct control, an individual or institutes gains the authority to dictate the actions of the controlled business. Direct control comes from one of two means, ownership or regulation. Through its bailout purchase of a majority share of corporate stock, the U.S. Government has gained control over numerous businesses such as General Motors. Through the recently passed healthcare regulation, the government has dictated the product and service offerings and prices of numerous companies as well as the purchasing habits of all U.S. citizens within this space.

The government’s direct control over numerous businesses, begotten through ownership and regulatory policy, is why StrategyDriven believes the U.S. Government has control over fifty-one percent of the U.S. economy. The firing of GM’s CEO and caps and reductions of CEO salaries as cited above further illustrate the government’s use of its direct control over businesses that were once part of the private sector.

As always, StrategyDriven is not taking a position as to whether or not this degree of ownership and control by the Federal Government is appropriate. Instead, we simply highlight the consequences of these actions, namely that political forces will now intermingle with market forces to dictate the course of business. Given the extent of the government’s control over the previously private marketplace, this introduction of political drivers will have significant ramifications and warrants consideration and responsive action by business executives and managers.

Final Request…

StrategyDriven Editorial Perspective PodcastThe strength in our community grows with the additional insights brought by our expanding member base. Please consider rating us and sharing your perspectives regarding the StrategyDriven Editorial Perspective podcast on iTunes by clicking here. Sharing your thoughts improves our ranking and helps us attract new listeners which, in turn, helps us grow our community.

Thank you again for listening to the StrategyDriven Editorial Perspective podcast!

Sources

For an up-to-date listing of U.S. Government bailouts, see: “Eye on the Bailout – Bailout Recipients,” Pro Publica (http://bailout.propublica.org/main/list/index).

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StrategyDriven Editorial Perspective – You Don’t Get Something for Nothing

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Some would argue that with President Obama’s signing of health care legislation into law a great deal of uncertainty was eliminated from the marketplace. While the uncertainty associated with whether or not health care legislation would become law has been resolved, the new healthcare entitlement itself represents an injection of new uncertainty into the market. As is the case with many laws, the various regulatory agencies of the U.S. government must now determine the specifics of how the new law will be enacted. This process itself may take several years to accomplish; allowing the uncertainty to continue to fester within the U.S. marketplace. Additionally, legal challenges as to the constitutionality of the healthcare law also inject an unknown into the business environment. Thus, businesses are left to deal with the healthcare uncertainty at least for the time being.

One thing is for certain, you don’t get something for nothing. Provisions of the new healthcare law provide for the extension of benefits to millions of currently uninsured Americans. Insurance companies will not be able to deny coverage to individuals with pre-existing health conditions and there will no longer be lifetime insurance payout limits. Another requirement extends the age for which children can be carried on their parent’s insurance policy to twenty-six. …and the list goes on. All of these additional healthcare benefits have to be paid for by someone or some company even if the specifics of those payments remain unknown for some time.

Some leaders already estimated the cost of the new healthcare law on their organization as:

  • AT&T: $1,000 million
  • Verizon: $970 million
  • Deere & Co.: $150 million
  • Beoing Co.: $150 million
  • Caterpillar: $100 million
  • Prudential Financial: $100 million
  • Lockheed Martin Corp.: $96 million
  • 3M Co.: $85-$90 million
  • Exelon Corp.: $65 million
  • AK Steel: $31 million
  • Eaton: $25 million
  • Illinois Tool Works: $22 million
  • Xcel Energy: $17 million
  • Valero: $15-$20 million
  • Honeywell: $13 million
  • Goodrich: $10 million
  • Allegheny Technologies: $5 million1

Other companies warning of an increase in benefits costs include: Con-Way Inc., Navistar Inc., Xerox Corp., Public Service Enterprise Group Inc., and Met Life Inc.2

“The total cost of this [healthcare legislation] has been significantly underestimated,” said Jim Rogers, Chief Executive Officer of Duke Energy Corp. and a director of U.S. health insurer Cigna Corp. “Corporations are going to pay billions of dollars this year that no one even talked about in the debate and that’s just the beginning.”

Rogers said the health-care law makes it more economical for Duke Energy to pay a penalty for not providing health coverage for employees, forcing workers to “go shop” for a plan. The company won’t take this route, he said.

“Your health-care program is important; it demonstrates that you care about your employees,” he said. “So as a practical matter we won’t be driven by the most economic thing to do, we will be driven by taking care of our employees.”3

StrategyDriven Recommended Practices

So what is known? Unless the new healthcare law is found to be unconstitutional, it is reasonable to infer that existing capital within our economic system, regardless of its source, will be diverted in larger portions to the healthcare industry – and away from other market sectors. It is also reasonable to assume that those receiving health care coverage will make greater use of the medical services now available to them than simply the emergency room visits they were entitled to before. These reasonable yet broad assumptions drive StrategyDriven leaders to consider the following strategic options:

  • Eliminating, streamlining, and outsourcing all labor intensive work activities. The goal is to reduce hiring and/or eliminate headcount in order to avoid the potential costs associated with the new healthcare legislation. In the case of outsourcing, serious consideration should be given to transferring those functions not absolutely required to be performed within the United States to overseas providers.
  • Relocating operations to another country not as heavily burdened with taxes and other mandates. The goal is to reduce non-value adding payments required by the government. Consideration must be given to other added costs such as transportation and importation taxes when evaluating whether or not to relocate.
  • Examining the potential competitive advantage the organization’s health care program provides when seeking to attract and/or maintain talent. The goal is to use the organization’s healthcare benefits as a differentiator when acquiring and maintaining top performing individuals.
  • For those organizations providing products and/or services to the healthcare industry, reevaluating the company’s production capacity with respect to the potential change in the demand resulting from the influx of millions of newly insured patients. The goal is to be appropriately prepared and positioned to seize as much of the newly created market as possible.
  • For those organizations not currently providing products and/or services to the healthcare industry, considering the impact of the diversion of discretionary personal funds and/or corporate capital away from their market segment. This evaluation should take into account the extent to which the product and/or service is provided are a human or business necessity. The goal is to estimate the amount of business loss that may be incurred because of the diversion of personal and corporate funds to the healthcare industry.
  • For those organizations not currently providing products and/or services to the healthcare industry, evaluating the company’s capability and opportunity to provide products and/or services to the healthcare industry. The goal is to be appropriately prepared and positioned to seize some of the newly created market if it is reasonable for the organization to do so.

Final Request…

StrategyDriven Editorial Perspective PodcastThe strength in our community grows with the additional insights brought by our expanding member base. Please consider rating us and sharing your perspectives regarding the StrategyDriven Editorial Perspective podcast on iTunes by clicking here. Sharing your thoughts improves our ranking and helps us attract new listeners which, in turn, helps us grow our community.

Thank you again for listening to the StrategyDriven Editorial Perspective podcast!

Sources

  1. “Companies Take Billions In Health Care Charges,” Reid Wilson, National Journal, April 2, 2010
  2. “Deere & Co. says new health care reform law will increase fiscal 2010 expenses by about $150M,” Josh Funk, Associated Press, March 25, 2010
  3. “Duke Energy Says Health Law to Result in ‘Large’ Cost (Update1),” Kim Chipman and Jordan Burke, Bloomberg, April 01, 2010

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StrategyDriven Editorial Perspective – Self Inflicted Uncertainty

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On February 2, Dow Jones reported the Obama Administration’s decision not to expand the U.S. Strategic Petroleum Reserve as had been provisioned under the Energy Act of 20051. Energy Secretary Steven Chu indicated the basis for the decision was that the current reserve of 727 million barrels of crude oil met international standards.

(The International Energy Agency established a 90 day crude oil reserve standard. Filled to capacity, the U.S. Strategic Petroleum Reserve covers approximately 80 days of imports.)

At first glance, this decision may appear to be ill conceived. Rising oil consumption combined with no additional storage capacity suggests that the U.S. would fall short of meeting the IEA reserve standard with ever increasing severity. Closer examination of U.S. oil consumption relative to the volume of its strategic petroleum reserve indicates that relatively small projected growth in petroleum consumption in the next 20 years supports the decision2. (See Figure 1: U.S. Strategic Petroleum Reserve Compared to Consumption)
Read more

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StrategyDriven Editorial Perspective – Believe None of What You Hear

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StrategyDriven Editorial PerspectiveEver known a politician to renege on a campaign promise, say something misleading or simply just wrong?

So many politicians lie (we don’t mince words here… if our children told such stories we’d punish them for lying) that we accept it as a part of the political game. And members of both parties are guilty as charged. These falsehoods cause harmful uncertainty that can be detrimental to businesses and the economy because they diminish business leaders’ ability to project, strategize, plan, and execute.

Some of these falsehoods can be easily recognized and dealt with reasonably. No one really expected politicians to reveal their back room deals by televising healthcare negotiations on CSPAN. Likewise, we can read a lot of lips but know that bigger government requires higher taxes. FactCheck.com aggressively identifies the factual errors politicians make; helping eliminate the uncertainty of their creative non-fiction.

Other falsehoods are not so easily dealt with. Businesses are hurt and significant uncertainty created when the government willfully breaches a contract. These are not broken campaign promises but legally binding agreements that those in power have decided not to abide by because the provisions have become politically unfavorable. Such breaches of integrity are materially harmful to businesses specifically and the economy and public in general.

Unnecessary Uncertainty in the U.S. Energy Market

Let’s briefly examine one government breach of contract in the clean energy market; a market vital to both national security and the reduction of carbon emissions.

Breach of Contract – National Spent Nuclear Fuel Repository

In 1982, Congress passed the Nuclear Waste Policy Act; making the U.S. Department of Energy (DOE) responsible for siting, building, and operating an underground disposal facility for high level radioactive waste, including the spent nuclear fuel from the nation’s 104 nuclear reactors.1 In 1987, Congress selected Yucca Mountain as the location where this underground repository would be built. The Yucca Mountain facility was to be constructed and to begin accepting waste by 1998. While nuclear reactor owners faithfully pay their dues to the government in support of the repository, Yucca Mountain is currently little more than an access tunnel bored into the side of a mountain.2

“I will continue to leverage my leadership position to prevent the dump from ever being built.”

Harry Reid
U.S. Senate Majority Leader
Nevada (D)

A 2007 statement on the continued pursuit of the Yucca Mountain project.3

In 2008, the DOE applied for a license to construct the Yucca Mountain repository by 2020, 22 years late.4 However, the Obama Administration announced in February 2010 that it would withdraw its application to build the repository. Energy Secretary Steven Chu emphasized that the withdrawal would be ‘with prejudice’ – a legal definition prohibiting resubmission by a post-Obama administration.5 Additionally, the Obama administration has announced that it will defund the Yucca Mountain repository project in its 2011 budget submission to Congress.6

Impact

Utilities involved have filed a total of 71 breach of contract lawsuits against the Federal Government. DOE estimates the government’s liability at $12.3 billion. Nuclear utilities estimate damages claims will total $50 billion. As of today, 51 of the 71 cases are pending in either the Claims or Federal Circuit Courts, 10 have been settled, 6 were voluntarily withdrawn and 4 have been litigated through a final non-appealable judgment.7

…there is, of course, the additional cost of litigation (courts, lawyers, etcetera).

In addition to the cost impacts, five states (Minnesota, West Virginia, Wisconsin, Illinois, and Kentucky) currently prohibit construction of new nuclear plants in part because of a lack of a national spent fuel repository.8 This prevents communities in these states from realizing the benefits of the estimated 1400-1800 jobs created during the 4-5 year construction period and 400-700 workers needed to operate and maintain the plant thereafter.9 These numbers don’t account for the community services and business jobs created to support these individuals.

…there is, of course, the additional non-carbon emitting power these plants would provide the region.

Regardless of the arguments for and against the suitability of locating the spent nuclear fuel repository at Yucca Mountain, Nevada, this case and the judgments against the Federal Government clearly illustrate a breach of contract that has created significant market uncertainty and damaged businesses.

StrategyDriven Recommended Practices

As the single largest consumer of goods and services within the U.S. economy, it would be virtually impossible, if not undesirable, to avoid doing business with the Federal Government. And even if direct business activity can be avoided, the effects of government interaction with other organizations cannot.

The politics of governing and the willingness of some politicians to renege on their campaign promises and/or government contracts require corporate leaders to take actions protecting their organization from this unnecessary risk. While not intended to be an all inclusive list, StrategyDriven recommends those contracting or subcontracting with government agencies take the following risk mitigation actions:

  • validate key government project assumptions and facts (timelines, resource availability/capacity, technologies, cost, existing regulatory structures, etcetera)
  • identify ‘political will’ risk drivers in government project assumptions
    • adjust risk estimates and associated contingency planning and funding accordingly
    • verify project popularity with the general public and the likelihood such popularity will be maintained for the term of the project
    • check for bipartisan project support
  • establish contingency plans for government project delays and cancellations
  • review government proposals against the past performance on similar projects
  • monitor progress on government projects just as you would internal projects

Final Thought…

We used the nuclear power industry example because of the already litigated breach of contract lawsuits clearly supporting our assertion that the federal government does not always fulfill its obligations. Because we don’t believe this example to be either an aberration or the last time such a breach will occur, we encourage the practices presented here to be applied in all dealings with Federal, State, and local governments.

Final Request…

The strength of our community grows with the additional insights brought by our expanding member base. Please consider voting for us on Podcast Alley by clicking here. Casting your vote for the StrategyDriven Editorial Perspective Podcast improves our ranking and helps us attract new listeners which, in turn, helps us grow our community. Thank you again for listening to the StrategyDriven Editorial Perspective Podcast!

Sources

  1. “The Nuclear Waste Program,” U.S. Department of Energy, http://www.ocrwm.doe.gov/about/History_Of_The_Nuclear_Waste_Program.shtml
  2. “The Washington Post’s distorted take on Yucca Mountain,” Hugh Gusterson, Bulletin of Atomic Scientists, March 27, 2009, http://www.thebulletin.org/web-edition/columnists/hugh-gusterson/the-washington-posts-distorted-take-yucca-mountain
  3. “Yucca Problems Mount For DOE: Transportation, Costs, Not To Mention Congressional Opposition From Harry Reid,” Johnny Gunn, The Nevada Observer, March 15, 2007, http://www.nevadaobserver.com/Archive/070315/Featurestory%201.htm
  4. “The Washington Post’s distorted take on Yucca Mountain,” Hugh Gusterson, Bulletin of Atomic Scientists, March 27, 2009, http://www.thebulletin.org/web-edition/columnists/hugh-gusterson/the-washington-posts-distorted-take-yucca-mountain
  5. “Yucca Mountain’s death just a few steps away,” Lisa Mascaro and Stephanie Tavares, Las Vegas Sun, February 2, 2010, http://www.lasvegassun.com/news/2010/feb/02/yuccas-death-just-few-steps-away/
  6. “Proposal would eliminate funding for Yucca Mountain,” Steve Tetreault, Las Vegas Review-Journal, February 1, 2010, http://www.lvrj.com/news/proposal-would-eliminate-funding-for-yucca-mountain-83230447.html
  7. “Greenberg Traurig’s Jerry Stouck Discusses Nuclear Fuel Cases,” Wyoming Trial Lawyers Association, September 25, 2009, http://wtlachannel.squarespace.com/the-wtla-blog-page/2009/9/25/greenberg-traurigs-jerry-stouck-discusses-nuclear-fuel-cases.html
  8. “Another Major Setback for “Nuclear Renaissance”: Industry Goes 0-6 in 2009 Efforts to Overturn State Bans on New Nuclear Reactors.,” Leslie Anderson, Nuclear Information and Resource Service, August 27, 2009, http://www.nirs.org/press/08-27-2009/1
  9. “Testimony for the Record [to the U.S. Senate Committee on Energy and Natural Resources],” Carol L. Berrigan, Director, Industry Infrastructure, Nuclear Energy Institute, November 6, 2007, http://energy.senate.gov/public/_files/CBerriganTestimony110607.pdf

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StrategyDriven Editorial Perspective – Unnecessary Uncertainty

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Washington dithering, favoritism, and power grabs are crushing the American marketplace. The question is: Can it survive?

All markets possess a natural amount of uncertainty. And it is from uncertainty that great business opportunities are born. Some uncertainty, however, is unnecessary; creating risk without proportionate reward. Fully avoidable, unnecessary uncertainty arises from the efforts of those who would seek to manipulate and/or control the marketplace to advantage some and punish others. It is not an attempt to bring fairness to the market through regulation, as in the case of monopolies, but rather to garner personal power by changing the rules of an equitable game after it has already started.

“By pursuing his own interest (the individual) frequently promotes that of the society more effectually than when he really intends to promote it. I have never known much good done by those who affected to trade for the public good.”

Adam Smith (1723 – 1790)
author of The Wealth of Nations
and the father of modern economics

Who creates unnecessary uncertainty? Sometimes it results from the market turmoil created by the manipulations of a few such as the grab for wealth by former Enron CEO Ken Lay. At other times, it is born of the power grabs and indecision of politicians – Federal, State, and local from both parties.

Today’s marketplace is stifled under the tremendous weight of unnecessary uncertainty created by the lawmakers in Washington D.C. as they vie for power behind closed doors and procrastinate in decision-making. Marketplace uncertainties resulting from the continuous and unscrupulous redirections, inaccurate information, and dithering of politicians include:

  • Capital Availability Uncertainty
  • Investment/Expansion Cost Uncertainty
  • Resource Availability Uncertainty
  • Consumer Buying Power Uncertainty
  • Produce/Service Demand Uncertainty

Going forward, we’ll examine the areas of unnecessary uncertainty; calling out the policies, practices, and perpetrators driving these conditions and their impact on the marketplace. But unlike other commentators who decry the unfairness of these events or focus on what should be done in Washington or what the masses should do to shape what is done in Washington, we’ll share with you our thoughts on how the StrategyDriven organization itself deals with these conditions in a way that positions it for long-term success. And we won’t be suggesting the next best stock pick.

We’ll keep the discussion fact-based, balanced, and business focused. As we share our thoughts with you, we hope you’ll share your thoughts with us – and challenge our thinking and perspective.

Final Request…

StrategyDriven Editorial Perspective PodcastThe strength in our community grows with the additional insights brought by our expanding member base. Please consider rating us and sharing your perspectives regarding the StrategyDriven Editorial Perspective podcast on iTunes by clicking here. Sharing your thoughts improves our ranking and helps us attract new listeners which, in turn, helps us grow our community.

Thank you again for listening to the StrategyDriven Editorial Perspective podcast!

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