Monday, December 6, 2010

Electric Cars Boom?

There are only about 40,000 electric cars and trucks in the U. S. today compared to a total for all cars and trucks of 246 million. That works out to about 1/60th of 1% marketshare for electric vehicles. This will change dramatically beginning in 2011. According to a study commissioned by the Center for Entrepreneurship & Technology at University of California at Berkeley published in August 2009, by 2030, less than 20 years from now, U. S. electric car sales are forecasted to account for 64% of light vehicle sales and comprise as much as 24% of the entire light vehicle fleet!

How do we know this very major vehicle transformation is likely to happen? Why is this very important? And what are the consequences for our economy and government policies? Aside from this study, we know this boom is likely to happen for a number of reasons. One big reason is the big success in recent years for the hybrid cars, especially the Toyota Prius, which run on both electricity and gasoline, developed and sold by most of the major manufacturers. Another reason is the very ambitious plans many of the manufacturers have for building and selling all-electric cars, including the all-electric version by Toyota of its Prius, General Motors' Chevy Volt, Ford's Focus, and Renault-Nissan's Leaf.

A big third reason is the performance and ambitions of a little known 42 year old very smart guy from Israel named Chai Agassi. (I don't know if he's related to Andre, the tennis player.) I saw him interviewed on TV a few days ago on Charlie Rose's TV program and was very impressed. He started out at 18 as a computer programmer who later founded some software development firms. Then in 2002 he joined SAP AG, the very large German headquartered business management software concern where he quickly became their chief technology officer. In 2003 at age 35 Time magazine named him Most Influential Businessman in the World!

Agassi left SAP in April 2007 to pursue interests in alternative energy and climate change and in October 2007 founded a company he named Project Better Place, having been inspired by a question asked by a fellow participant at the 2005 World Economic Forum in Davos, Switzerland. The question was "How do you make the world a better place by 2020?" The focus of his company was developing a green transportation infrastructure based on electric cars as an alternative to the current fossil fuel technology, i. e. cars fueled by primarily by gasoline.

What has Agassi done with his company now called just Better Place since its founding a little over three years ago? It's pretty amazing. He has developed a business model wherein customers enter into contracts to purchase driving distance similar to the mobile telephone industry where customers contract for minutes of airtime. The electric cars will be built and sold separately from their battery pack provided by Better Place, just like today's cars fueled by gas are sold separately from their fuel. Customers won't own the battery packs, but must lease them from Better Place, who will build a network of battery pack switching exchanges where customers can obtain new installed batter packs in just a minute or so, much faster than one can typically fill a car with gas at a gas station.

As of April 2009 Agassi had raised $400 million in venture capital to finance initial operations and received tax break offers from several countries and states. The investors include the big investment banking firm of Morgan Stanley. The initial implementation of his business model will take place in Israel with all needed agreements already in place in a partnership with Renault-Nissan who will build the electric vehicles. Renault has committed to spend $600 million over three years to develop a car with swappable batteries. Last year Better Place successfully demonstrated their switching station in Yokohama, Japan at the invitation of the Ministry of the Interior. In April this year they launched a 90 day similar demonstration for taxi electric cars in Tokyo using three Nissan Rogue crossover utility vehicles that had been converted into electric cars. Apparently this also went well.

The company has also announced an agreement to set up a network in Australia with energy firm AGL Energy and financial advisor Macquarie Capital Group and expect to raise hundreds of million in capital there. And in October this year announced a commitment to launch a three year demonstration program with electric-powered taxis in the San Francisco Bay Area in partnership with the cities of San Francisco and San Jose, taxi operators, several consumer and environmental organizations, plus the San Francisco Public Utilities Commission. Better Place has also announced that they have selected Denmark and Hawaii as two other test markets where network electricity will likely be generated by renewable energy from solar and wind farm sources. Finally, the company is currently in talks with more than 25 additional regions in the world, including Canada, California state-wide and Oregon. Interestingly, Better Place is now headquartered in Palo Alto in the middle of Silicon Valley.

It seems to me that Agassi and Better Place, just three years from its founding, are well on their way to being a major player in the electric car industry, assuming he has good, experienced people in place to help him manage their innovative, varied and growing world-wide activities in the U. S., France, Israel, Japan, Denmark, and Australia.

Why is this projected boom in electrical cars important? One of our national priorities is energy independence, especially from the Middle East and other unstable areas. U. S. oil imports in 2030 under the electric vehicle deployment scenarios are projected to be 18-38% lower than the scenario of improved internal combustion engine fuel efficiency, and this is equivalent to 2.0 -3.7 million barrels per day. In 2008 we imported 2.3 million barrels per day from the Persian Gulf. So one benefit from the boom is greater energy independence from lower oil imports. Another related benefit is an improved trade deficit, considering that 59% of our 2008 trade deficit was from oil imports.

Other reasons why the boom is important lie in health care cost savings and new attractive investment opportunities. The projected health care cost savings come from lower emissions of airborne pollutants when vehicles are charged using non-polluting sources of electricity. The net present value of these savings have been estimated at between $105 billion and $210 billion to 2030. That's obviously quite substantial. New investment opportunities are primarily in domestic battery manufacturing and deployment of battery charging infrastructure such as planned by Better Place. This ought to also provide opportunity for more U. S. exports in these areas, improving our trade balance. At present nearly all batteries in U. S. vehicles are made in Asia, especially China, South Korea and Japan.

Consequences for our economy and U. S. government policies? Our economy certainly should benefit, assuming the right government policies are in place to encourage the projected boom in electric vehicles. The benefit comes from greater energy independence, a better trade balance, new investment opportunities, higher net employment from new investments, and health care cost savings. Many different existing and prospective new government policies will and should be affected by this boom. Among those coming to mind are trade agreements with other countries, tax policies and incentives, congressional earmark legislation, environmental rules and regulations, and policies adopted by state and local jurisdictions as a result of federal policies and incentives.

In the policy realm there should, among others, be meaningful tax incentives to support domestic investments in battery technology and battery charging infrastructure, The federal government should develop plans to purchase primarily domestically manufactured electric cars for their large fleets, and trade agreements should serve to support the development of our domestic industries in these fields.

I realize there are opponents and skeptics to this electric car boom scenario. The oil industry, those who own gas stations, and those who supply parts to the combustion engine auto industry are likely to be both opponents and skeptics. You can bet that there will be lobbying pressure to stop or at least slow down the boom. Many car buyers will no doubt be skeptical about the capabilities, driving range and the convenience of charging or battery replacement stations related to electric cars. Environmentalists will no doubt have concerns with the electricity sources that will recharge and replace car batteries. Certainly there will be significant challenges.

However, what is quite positive about all this is that there will definitely be much more competition and innovation in the transportation industry. This should be very good for consumers, opportunistic investors and businesses, as well as our economy overall.

Wednesday, December 1, 2010

Our Unsustainable Federal Budget Deficit

As most Americans no doubt know, our country has substantial financial problems that require urgent attention. If appropriate action is not taken, the problems will only get worse and become much more difficult to deal with. Virtually all of us will ultimately be materially affected, depending on what happens or doesn't happen.

One of the biggest problems is our unsustainable federal budget deficit, that is the annual fiscal year difference between U. S. government revenues or receipts and spending or outlays. For both years ending September 30th in 2009 and 2010 the federal deficit has ballooned to roughly $1.4 trillion, equivalent to between 10% and 11% of the country's Gross Domestic Product (GDP), the highest rate since the end of World War II. So the government is spending $1.4 trillion more than its receiving in taxes and other receipts and can only do so by borrowing this amount from creditors, including especially in recent years China.

The borrowing adds to our outstanding public debt, which totaled $13.56 trillion or as much as 94% of annual GDP at the end of the last fiscal year. It also adds to huge amount of interest we must pay on this high debt level, budgeted at $164 billion for fiscal 2010! As the debt increases with large annual deficits and interest rates very likely growing significantly in future years, the interest burden will increase dramatically. Obviously this financial situation is unsustainable and moreover it is threatening our prosperity and important role in global affairs.

Recognizing the seriousness of this issue, President Obama appointed an 18 member bipartisan deficit commission in February this year co-chaired by former U. S. senator Alan Simpson, a Republican, and former chief of staff under President Clinton, Erskine Bowles, a Democrat. In a 59 page report the commission has come up with a large number of prudent proposals that reasonably well address the difficult deficit problem and likely become starting points for President Obama's budget plan for FYE 2012 as well as the budget plan to be put together by the Republicans when the new Congress convenes in January.

The full commission is scheduled to vote on the proposals at a meeting tomorrow. If 14 or more members vote favorably on the package, the commission will issue a formal recommendation to Congress and the White House. Even if that doesn't happen, I think the commission has done its job and its proposals will still probably serve as reasonable starting points for the plans of both parties.

The commission's report is based on a plan to reduce the deficit 75% through spending cuts and 25% through revenue (largely tax) increases. Among noteworthy spending cut proposals are freezing pay for federal workers, including members of Congress, for 3 years; cutting congressional and White House budgets by 15%, eliminating all congressional earmarks; and increasing the minimum age for receiving full Social Security benefits over a long timeframe. Revenue increases would come from, among other sources, a 15 cent per gallon gas tax increase (rate is currently 18.4 cents) and reworking the IRS tax code including eliminating itemized deductions and interest deductions on mortgages above $500,000 on individual tax returns, and closing tax loopholes which induce American companies to base operations abroad. Most of these changes are not planned to be implemented until 2012.

How the panel proposed to deal with the huge $453 billion spending on Medicare and $290 billion on Medicaid is rather complicated and not entirely clear, but they have recommended to increase cost sharing for Medicare recipients, reduce payments to physicians for services rendered and to hospitals for medical education services, and focusing more on eliminating Medicare fraud, among a long list. Importantly, the panel seems unanimous in not wanting to adversely impact the very poor in our population in their recommendations.

I generally have no problem with the above proposals, given what's at stake, except that we shouldn't necessarily wait to implement every proposal until 2012, such as beginning to cut Defense expenditures by closing down unnecessary or marginally needed overseas military bases. Other reactions:

1. With 70% of aid going to the largest 10% of agribusinesses, why not finally eliminate all farm subsidies, which can save us $25 billion annually, rather than just a fraction of this aid?

2. The current tax deduction for interest on mortgages apparently costs the federal government $130 billion annually. Retaining the deduction for homeowners whose mortgages are under $500,000, but eliminating it for those who have a larger mortgage makes sense. I'd also be open to a tiered structure where the elimination partially begins at say $300,000 and gradually increases to the $500,000 level. Hopefully any of the realistic options could save us close to $100 billion each year.

3. How about increasing the federal tax on cigarette sales, currently $1.01 per pack, and other tobacco products? It might not have a significant impact on current federal revenues, but it may induce fewer people to smoke, especially teenagers, and thereby reduce future federal spending on health care through Medicare and Medicaid.

4. We should consider reasonable means testing for Social Security recipients, so that those who earn more than, say, $250,000 in current dollars, who do not really need this income, do not receive any Social Security, or perhaps no more than 50% of what they would have been eligible for.

5. Noting that the panel is recommending 15% cuts in the budgets of Congress and the White House, why not the same cuts for all the federal departments and agencies, or are these included already in the White House budget?

We won't know exactly how all this will turn out for at least several months, and it could be years, but I'm cautiously optimistic that the government is finally on the right track toward a more viable and balanced budget. Hopefully, Speaker-elect John Boehner and President Obama and their staffs can work together to get this achieved on a basis that can be approved by Congress and judged fair and satisfactory by the majority of the American people. However, unfortunately there is a real possibility that stubborn and ill-advised partisanship pushed by the more radical groups on both the left and the right will jeopardize and delay a prudent outcome.

Thursday, November 4, 2010

Reactions to 2010 Political Campaigns and Elections

There's no doubt the Tea Partyists and Republicans, as well as the owners of the TV stations, did extremely well in this year's political cycle, highlighted by results of the elections on November 2nd, and President Obama, as he acknowledged, took a "shellacking". The Republicans gained solid control of the House of Representatives, narrowed the majority held by Democrats in the Senate, and gained many more state governorships and legislatures under their control. With nearly an incredible $4 billion in campaign spending, a record for midterm elections, much of it on television advertising, the TV station owners must have had a great year.

However, with Obama in office for at least two more years, and having the powerful bill veto power, and with 53 colleagues and allies in the Senate compared to 47 for Republicans, the Democrats still have substantial leverage. It's also some comfort for Obama that like opinion polls for the Democratic Party, the Republican Party is not very popular either. Of major concern for the Democrats going forward, though, for the next ten years until the 2020 census, is the material advantage Republicans will have in congressional redistricting, optimizing their prospects for keeping control of the House of Representatives.

I think most analysts and commentators agree that the Republican successes were primarily due to understandable anger, frustrations, and serious anxiety of voters at their personal economic situations caused by joblessness, underemployment, decline in home values, foreclosures, concern about potential upcoming cuts to Social Security and Medicare, and how all of these would likely affect their standard of living and ability to retire in any kind of comfort. Since the Democrats controlled Congress and held the White House, voters with some justification placed most of the blame on Obama, Senate Majority Leader Reid and Speaker Pelosi.

While the policies followed by Obama and the Democrats have been strongly criticized by the Republican leadership, especially by Senate Minority Leader Mitch McConnell, I'm not convinced the policies generally were wrong, given the precarious state of the deep recession and our fragile financial system at the time. However, it appears evident that Obama's Administration and Democrats in Congress did not focus enough on jobs creation, probably could have been more attentive to the needs of American businesses, especially smaller businesses, and no doubt were not as willing as they should have been to incorporate prudent input offered by Republicans on major legislation such as healthcare and financial regulatory reform.

Now just a few comments on the campaigns. As I believe I've commented on in earlier posts, in my view the campaigns go on for far too long, there's far too much negative advertising, far too much money is spent, voters too often don't even get a clear where idea where candidates really stand on many important issues, and it's embarrassing and sad that such a relatively small percentage of eligible voters actually show up to vote. Many reforms are needed, but unfortunately few will probably be approved and implemented, in part due to our Constitution's Bill of Rights, because the media doesn't do their job adequately, and because too many voters are cynical about politics, apathetic and lazy.

Well, what happens now? Democrats and Republicans will quickly be discussing and fine tuning what their objectives, priorities and strategies will be for the remainder of the year. Obama has apparently invited their political leaders to dinner at the White House on November 18th to talk about how they can cooperate in improving the economy and job opportunities for unemployed and underemployed Americans. Presumably McConnell won't use this opportunity to repeat his rather clumsy and overtly partisan statement that making sure Obama is only a one term president is his very top priority. Both sides are reluctant to compromise, but possibly willing to go ahead if it's not a very major issue, and/or they get enough in return. Hopefully there will be some general agreement on the directions we need to go on the economy, jobs, cutting the budget deficit and managing our public debt more prudently.

There are several areas where cooperation and compromise can and should be achieved. The most obvious one is on extending the President Bush tax cuts scheduled to expire on December 31st. Obama will no doubt be willing to compromise and include extension for households earning more than $250,000 as the Republicans are demanding, although it will likely add to our budget deficit until economic growth picks up. The question is the period of extension and if the $250,000 will be increased to $500,000 or even $1 million. Other areas of potential cooperation includes international trade and foreign policies. I doubt very much else of serious substance will happen legislatively before January 2nd when the new Congress convenes.

In 2011 I'd expect there will be serious political pressures to make at least some changes to the health care law passed this year that will be more acceptable to businesses, that will more convincingly reduce overall costs and that will serve to somehow limit expected federal spending obligations. We can also expect legislation on immigration reform, energy and public education reforms, and possibly some tinkering with the recently enacted financial regulatory reform law to make it more acceptable to Republicans.

It's rather obvious that both political parties will focus a great deal in 2011 on doing things that will please and solidify their respective bases, impress the increasingly influential political Independents, and position themselves favorably for the critical 2012 presidential and congressional elections, in addition to doing what they consider in the best interests of their party and the country.

Obama is a smart pragmatist and clearly recognizes he needs Republican support for the next two years and, as a result, will quite likely move more to the center and a little bit right, depending on the issues under consideration. The key person for him to try to work with on a bipartisan basis is Speaker-elect Boehner who has just emphasized that his agenda is the "public's agenda". We know it relates to job creation, limiting federal spending, keeping taxes low, and reducing our budget deficits. But what specifically? I guess we'll find out in the next few months.

It will also be very interesting to hear who among Republicans will move to the front as the leading candidate to oppose Obama in 2012. I can't believe it will turn out to be Sarah Palin, though Obama probably would hope it might be her, and suspect it will be one of the more moderate Republican governors. We'll likely know by summer next year.

Monday, November 1, 2010

California Proposition 19 - Legalizing Marijuana

Reportedly as many as 100 million Americans have tried marijuana (also known as "cannabis") in different forms for relaxation, pleasure and/or medicinal purposes, although I greatly doubt the actual number is that high. It's also reported that sales of marijuana products in California alone totaled as much as $14 billion annually in recent years, an incredibly high and a little hard to believe number.

As most knowledgeable voters know, Proposition 19 allows people 21 years or older to possess up to one ounce of marijuana, cultivate, or transport this hemp plant for personal use, but it will have no affect on federal law which generally still forbids these activities. I was originally leaning towards voting for the proposition, but after more research and reflection have decided to oppose it, though with mixed feelings.

There were a number of familiar reasons why I was earlier leaning to support the measure. Legalizing marijuana should restrict funding to the dangerous and criminal drug cartels operating in Mexico and other parts of Central America, as well as in South America, and the many criminal gangs operating in California. That's a good thing. It would probably also save substantial law enforcement resources that are now being spent on arresting misdemeanor marijuana possession cases which could probably be better deployed to combat much more troubling violent crimes. Another reason is that the measure would allow taxation on marijuana sales that, according to the state's Board of Equalization, could generate a badly needed estimated $1.4 billion in new annual revenue.

The above are very compelling reasons for legalization. However, there are also good reasons to oppose the measure as written. First, it doesn't make sense to me that each of hundreds of local municipalities should individually decide how to control and tax marijuana sales as opposed to having a uniform position throughout the state. Another disturbing factor in this debate is the federal government's current law against legalization and the fact that U. S. Attorney General Eric Holder opposes Proposition 19 and has made it clear that federal authorities will continue to prosecute those who violate the federal law. Approval of the measure will lead to a great deal of uncertainty for consumers and dealers, as well as for California authorities, in addition to the need to spend a lot of wasted moneys on lawyers for meetings in Washington, hearings,and trials.

Furthermore, passing the measure will very possibly have some serious unintended consequences affecting public safety and federal funding for our public schools. As opponents have claimed, the measure doesn't provide the Highway Patrol with any tests or objective standards to determine what constitutes driving under the influence, unlike the case with alcohol. It might well also create problems for employers, especially those of bus and truck drivers, who need a strict policy for employees to be drug free for the interest of public safety. Perhaps more important, given the federal law and Mr. Holder's position on prosecution of violators, the measure's passing could jeopardize California's prospects for obtaining federal contracts and funding for our public schools. One superintendent has stated that the school funding at stake could be as much as $9.4 billion! That's a great deal to risk.

While I support the concept of legalization for the reasons cited above, I agree with many of the well-known opponents, including the two main candidates for both governor and state attorney general, that Proposition 19 is not the right measure at this time. It would certainly be desirable for the state and the federal government to be in sync on this issue, and I'm not sure how much this has been pursued or exactly why there is a policy difference at present. That should be examined and the public advised. In any case, it seems to me that the new governor and state legislature should at least seriously pursue a modified proposition that would apply to the entire state and address the major weaknesses brought up by opponents, such as the public safety issues and the standards that would be applied by the Highway Patrol and other authorities.

Friday, October 29, 2010

California's Government Reform Angel

In America's business world, an angel investor, also just called angel, is generally a wealthy individual who provides capital and strategic planning advice for a promising business start-up, usually in exchange for different types of equity securities, giving the investor a significant ownership interest in the start-up. In this post I want to discuss a different type of angel, one who is providing capital and advice with the noble and highly ambitious objective of successfully reforming California's dysfunctional state government.

The little known and unlikely angel's name is Nicolas Berggruen, 49, a French born businessman whose net worth has been estimated by Forbes magazine at $2.2 billion, primarily earned from investments in a number of very different businesses, including a hedge fund management company, a leveraged buy-out company, windmill farms in Turkey, a large newspaper publishing firm in Spain, and a failing German department store group he took over earlier this year. He seems to be a very eccentric fellow, reportedly owning no home and no car, but travelling around the world in his own plane and living in fancy hotels.

What's his connection to the U. S. and California? Well, he got a degree in finance and international business from New York University. In his younger days he was employed by some American companies. He's a member of the Young Presidents' Organization, the global network of chief executive officers originally started in the U. S. He sits on the board of several major museums, including LACMA in Los Angeles and the Museum of Modern Art in New York. Berggruen came more into the public eye recently when he contributed $250,000 to oppose California's Proposition 23 that seeks to suspend the landmark global warming law. He has founded an independent non-partisan think tank and consultancy, the Nicolas Berggruen Institute (NBI), based in New York, dedicated to exploring new ideas for good governance suited to the new and complex challenges most governments, including California, are now facing.

Berggruen decided that California's government would be a worthy volunteer assignment for NBI and a few days ago announced that he was forming a high profile group he named Think Long Committee for California to work on pragmatic, non-partisan plans to fix the state government. The Committee's first meeting took place two days ago on the campus of Google hosted by one of its members, CEO Eric Schmidt, with Governor Arnold Schwarzenegger as a guest. Notable among the other Committee members are former secretaries of State George Schultz and Condoleezza Rice, former Assembly speakers Willie Brown and Bob Hertzberg, former governor Gray Davis, former state treasurer Matt Fong, developer and philanthropist Eli Broad, and partner of the investment firm TGP Capital, David Bonderman.

Berggruen has committed at least $20 million for the Committee to get this project off the ground. He's indicated he envisions a California government that is competent, flexible and efficient, able to close the innovation and entrepreneurship gap that is emerging between California and places like Singapore and China, and has emphasized the importance of thinking long-term. He has apparently given the Committee six months to come up with their report and specific recommendations for implementation.

There have been some other recent unsuccessful non-government efforts to try to reform California's government. One involved organizers for a state constitutional convention which had to be abandoned because they didn't have enough funds. Another major effort was made by a think tank, California Forward, a political organization created in 2006, that was advocating for a package of statewide propositions to be put on the ballot for next week's elections. Impressively the effort was encouraged by several socio-political groups and supported by $16 million in donations from five major foundations. Hertzberg has been a co-chair of California Forward. However, the think tank lost momentum when Sacramento legislators balked at its plans and surprisingly nobody, apparently including the foundations, stepped forward to provide the extra funding needed to put the group's proposals before the voters.

It obviously won't be easy for Berggruen and Think Long Committee for California to succeed, given the degree of dysfunction involved and expected resistance from the Legislature, the public employee unions, lobbyists and other special interests. However, he has assembled a very experienced and talented group with deep knowledge of California politics and strong private sector business management and finance skills. With Berggruen's financial resources and possible access to additional resources from Broad and some of the other well-to-do members, and perhaps also the five big foundations that supported California Forward, they should have adequate funding.

It's hard to understand why it should take someone like Berggruen, from France (and homeless!), to organize a serious independent effort to fix California's government, but I think it has a fair chance to succeed. As long as the Committee members work together cooperatively on a non-partisan basis, they will most probably come up with a viable report with sound recommendations. The public is certainly ready for prudent reform and for the most part will support the effort. The prime challenges will be in overcoming the resistance from political opponents and those who will be adversely impacted financially, and, of course, gaining final legislative approval.

I would hope and expect that our new governor, whether Meg Whitman or Jerry Brown, would also support the Committee's non-partisan recommendations and would urge the Committee to invite the new governor to one of their upcoming meetings. Thank you Mr. Berggruen for your initiative and generosity. Bon voyage!

Thursday, October 21, 2010

Education Reform Revisited

Despite stubborn resistance from the two large teachers unions, public K-12 education reform in this country seems to be slowly moving forward in the right direction, but there's definitely a great deal still to be done, and one has to expect that it will take many more years to complete what is needed.

I published two posts on education reform on my blog before which discussed most of the key problems and challenges and offered a long list of solutions. The first was titled "K-12 Public Education" published on 11/23/07 and the second was "Public Education" on 11/12/08, nearly two years ago. Certainly I agree with those who maintain that this issue should be one of America's top priorities, right behind national security and rebuilding our nation's economy.

Some of the key concerns cited were that in too many schools, especially in many of our larger urban areas, there are unacceptably high drop-out rates, disgraceful 40-50% graduation rates, poor test scores, clear evidence that a disturbing percentage of these students were not mastering the material taught, with the result that they had no chance to go to college and little chance to get any good-paying jobs. In fact, a great many of them in recent years have turned to crime and ended up in our crowded prisons. As I mentioned in my first post in 2007 as many as 75-80% of the 2.2 million people in our federal, state and local prisons and jails were high school drop-outs! Embarrassing, shameful and sad!

Just from an economic point of view, how much better off would our country and society be if our educational system, supported perhaps in many cases by better parenting and more effective community organizations, could get more of these kids to stay in school, graduate and obtain better jobs and staying out of trouble. The income and sales taxes they would pay, added to the large savings from not bearing the substantial costs of having many of them in jail or prison, could be quite substantial.

Why has this been happening? What and who are to blame? There are many different opinions. However, most knowledgeable educators, politicians and parents place much of the blame on poor performing and ineffective teachers and principals in many of our schools. This has been exacerbated by the difficulty and high expense generally involved in removing these people as result of terms in negotiated labor union contracts, particularly teachers and principals who have tenure, often achieved after just two years of employment.

The labor unions, primarily the American Federation of Teachers (AFT) and the National Education Association (NEA), have been effective in obtaining attractive benefits and job security for teachers and principals. But they have been unreasonably opposed to any significant education reforms, including meaningful objective teacher and principal evaluations and renegotiating the sensitive issue of tenure. Union leaders see their prime job as protecting their members, not providing a high quality education to their students, though, to be fair, they are of course also interested in that. These leaders don't want to see even justified lay-offs of their members because it would adversely impact the dues they receive which pays for their personal high levels of compensation and benefits. This is not acceptable and must be addressed in future contract negotiations.

Other reasons for the poor education results include, as most readers know, overcrowded classes, inadequate school facilities, starting teacher salaries that are often too low to attract more qualified personnel, schoolyard discipline, insufficient student fluency in English, negative impact of inner city gangs, unmotivated students, unsatisfactory parenting, and learning expectations for students by parents, administrators and teachers that are too low. There are two other reasons I want to add: insufficient affordable pre-K educational facilities and a bloated bureaucracy among federal, state and local education officials with overlapping responsibilities and unclear accountabilities. Obviously many schools are performing very well and these reasons don't apply to them. And, of course, the above conditions vary greatly among low performing schools.

The solutions to these problems are largely self-evident, especially: removing poor and ineffective teachers and principals, replacing them with higher salaried, higher qualified educators, more effective sharing of "best practices" by successful districts and schools, improving inadequate facilities, working with local police forces and community organizations to better combat gang interference, setting much higher expectations for student achievement, and getting rid of bloated educational bureaucracy and sharpen accountabilities. In most cases removing poor and ineffective teachers and principals will require tough negotiations and cooperation, backed by increased public pressure, with the relative labor unions.

Additional important and challenging solutions include better parenting and significantly increasing student motivation to get a good education, which clearly are closely related. Schools can contribute to better parenting by communicating effectively with parents at the beginning of each school year what the school expects of them and what parents have a right to expect from the school. This can be done by letter or by an orientation meeting for parents at school. Strengthening student motivation are responsibilities of both the school, primarily teachers and principals, and students' family, primarily the parents.

To my surprise, frankly, noted Newsweek columnist, Robert Samuelson, in his 9/13/10 column "Why School 'Reform' Fails", believes that frequently shrunken student motivation, especially in high schools, is the main reason why attempts at education reforms have largely failed in recent years. Motivation has weakened, he wrote, because more students "don't like school, don't work hard, and don't do well". I don't disagree with the latter, but the more important question is why. Parenting must be a big part of the equation in the majority of cases.

I should mention the "Race to the Top" competition initiative of President Obama and Secretary of Education Arne Duncan to distribute a total of $4.3 billion of federal money to selected states deemed most successful in implementing innovative and necessary reforms. In August Duncan announced ten winners including Washington, D. C., New York, Florida and Ohio, but excluding California. It seems to be a good initiative, supported by both Democrats and Republicans, but I'm concerned about the concept of spending that much taxpayer money to incent innovation and reform. It gets the attention of states to act, but is the process completely fair and is it necessary to spend that much money, considering the widespread concern with our budget deficit and national debt?

At the outset I said I felt that reform was slowly moving in the right direction. Why? The answer is in innovative recent reform initiatives by a small group of dedicated individuals that have gotten a great deal of favorable publicity:

1. The recently released movie, "Waiting for Superman", a very compelling public education documentary film by Davis Guggenheim, whose main point is that our future depends to a large extent on good teachers and that the coddling of bad teachers by their powerful unions virtually insures mediocrity, at best, in both teachers and the students in their care.

2. Innovative educator and reformer, blunt talking Geoffrey Canada, president and CEO of the Harlem Children's Zone school in Central Harlem, New York, who was a major commentator in Guggenheim's film and a guest on one of Oprah Winfrey's highly popular recent TV programs. A former teacher and consultant, Canada became very frustrated by the bureaucracy in our education system and the difficulty of effecting change. He has provided a pipeline for his students to follow from birth to college, giving them a safety net, so they would never fall of track. President Obama has described Harlem Children's Zone as a miracle and plans to try and replicate its success in cities across the country.

3. The new partnership among the Republican governor of New Jersey, Chris Christie, the Democratic mayor of Newark, Corey Booker, and Mark Zuckerberg, founder of Facebook, to completely reform Newark's very troubled school system. Christie is a native of Newark who won the election for governor last November on a strong promise to fix a "failed state". The three of them also were guests last month on one of Winfrey's TV programs. Christie said on the program that he will empower Booker to be in charge of the reform project and together they will choose the right new superintendent for the school system and discuss the major objectives and priorities of the project. The wealthy Zuckerberg announced he will provide a $100 million challenge grant to support the project! When asked why he would do that, Zuckerberg said he wants other children to have the same educational opportunities that he has had, and he really believes in Christie and Booker's commitment and abilities to accomplish the reform that is needed.

4. The popularity and success of the growing KIPP ("Knowledge is Power Program") of 99 schools in 20 states plus Washington, D. C., the nation-wide network of free open-enrollment college prep public charter schools in under-resourced communities. KIPP was founded in Houston, Texas in 1994 by two teachers, Dave Levin and Mike Feinberg, based on the following key education principles: outstanding teachers, more student time in school, rigorous college-prep curriculum, and a strong culture of achievement and support. In 2000 the co-founders of Gap, Inc., the large apparel retailer, Doris and Donald Fisher, gave KIPP a $15 million grant to help them finance expansion of the network. It's noteworthy that 95% of KIPP students are African-American or Latino/Hispanic.

5. The Bill and Melinda Gates Foundation of Microsoft fame is the biggest private player in the school reform movement providing a highly impressive $200 million annually in grants to elementary and high school education where innovation and reform are high priorities of its leaders!

Despite the substantial grants mentioned above, and their importance in providing needed funding for attracting top teachers and building quality school facilities, it's not always a requirement for education reform. A lot can be done by strong leadership, as was evident by what Michelle Rhee, chancellor of the school system, and Mayor Adrian Fenty, accomplished in initiating drastic reforms in Washington, D. C. Another example is demonstrated by the recently premiered "School Pride" TV program which shows what can be done by community volunteers, including teachers, parents and students, supported by local small business contributions of equipment and supplies, in renovating dilapidated schools, such as Enterprise Middle School in Compton, California.

The needed reforms will obviously not be achieved if it's left to the labor unions or even the politicians. It requires continuing public pressure and the active involvement on a sustained basis for years by tens of millions of parents and voters, supported by the local and national media. This clear conclusion is a no-brainer!!

Thursday, October 14, 2010

California Governor's Race

The nation's most populous state with an estimated 39 million residents has a well-deserved reputation as one of the best places to live, with a lot of things going for it, including unmatched climate, many excellent universities, and an incredible variety of superb recreational opportunities. Ironically, however, California these days is also a state known for its poor K-12 public school system, a generally unfavorable business climate, a very serious unemployment rate exceeding 12%, and a dysfunctional government with a lousy record in financial management.

The governor and his staff are expected to be leading the way to fix the problems in effective collaboration with the 120 members of the State Legislators, 80 in the State Assembly and 40 in the State Senate, currently controlled by a Democratic majority. For a number of reasons, the individual and collective efforts of the governor and state legislators have not been very successful in at least recent years, and many voters would probably say that their performance has been unacceptable or worse.

One of the reasons for this very unsatisfactory situation is that the politicians have been too ideological, have lacked pragmatic problem solving skills, and have not focused properly on meeting the needs of the state and its residents and taxpayers. It would also seem the majority of them were not independent enough to do what was right on too many issues, because of undue pressure from important campaign contributors, especially businesses in case of Republicans and public employee and labor unions in the case of Democrats.

The current governor, famous body-builder, actor, businessman and philanthropist, Arnold Schwarzenegger, a Republican, assumed office in November 2003 as result of a recall election removing Gray Davis, a Democrat. Schwarzenegger finished Davis' term and then was reelected in 2006 to serve through 2010. The upcoming election on November 2nd to determine the new governor is primarily a race between experienced business executive Meg Whitman, a Republican, 54 years old, trying to become the first female California governor, and veteran politician Jerry Brown, a Democrat, a still vigorous 72, whose father, Pat Brown, served as governor from 1959 until 1967.

As most California voters know by now, Whitman, one of the wealthiest women in the state, was CEO and President of eBay Inc., the large and successful internet auction and shopping firm, from 1998 until 2008. Before that she was an executive with The Walt Disney Company, DreamWorks, Procter & Gamble, and Hasbro. She was educated at Princeton and the Harvard Business School. Brown is the state's current Attorney General, assuming this position in 2007. Before that he was Mayor of Oakland, Chairman of the California Democratic Party, Secretary of State, and Governor from 1975 until 1983. He was educated primarily at U. C. Berkeley and the Yale Law School.

It looks like it will be a close race. According to polling by Rasmussen Reports as of October 4th, Brown had the support of 49% of likely voters and Whitman 44%, with 4% undecided and the remaining 4% for other relatively unknown candidates. On Tuesday Brown and Whitman had the third of their three debates over the past few weeks at Dominican University in San Rafael just north of San Francisco. The moderator was the well regarded retired NBC anchor and journalist Tom Brokaw. There were no special surprises and no outstanding performances, though I thought Brokaw did quite well. Democrats will probably feel that Brown won, and Republicans that Whitman did. Having watched all three debates, I thought they were about even in the first, Brown won the second, and Whitman had a slight edge in this last one.

As often happens in political debates, there was too much time devoted to relatively minor and insignificant issues and too little to the major substantive issues, such as specifically how the candidates will create the millions of new jobs they promise, keeping in mind that the governor has limited ability and authority to deliver, especially for private sector positions. Whitman clearly was more articulate with well rehearsed remarks, but I wish she didn't smile continuously throughout the debates. It seemed contrived. Brown, very passionate as usual, seemed to speak on-the-cuff most of the time, seemed overly serious and didn't smile hardly at all. Like most politicians, both Whitman and Brown have unfairly exaggerated the positions of their opponent on several issues.

Whitman's business experience is a big plus, but her complete lack of government experience and fact that she apparently didn't vote in political elections for the past 28 years are noteworthy negatives. I don't like the fact that she has spent more than $120 million of her own money financing her campaign, although it's not her fault that it's perfectly legal to do that. Furthermore, she makes a sound argument in saying that financing the bulk of her campaign herself makes her more independent from special interests compared to Brown, who has been much more needy of contributions from unions and others. Her changing and current position on reforming illegal immigration with no path to citizenship for any of them will most likely hurt her prospects with the Hispanic voters she has been courting in recent months. It may also hurt her with some non-Hispanic Democratic and Independent voters, although it will solidify her existing support from many Republicans.

However, I like Whitman's position that California needs to implement a comprehensive, innovative and effective program to retain and recruit new businesses to the state by making the business climate much more attractive by such as lowering corporate income taxes and streamlining state regulations to make us more competitive with other states such as Arizona, Nevada, Utah and Texas. While most owners and senior executives of these businesses might prefer to live in California, the overall economics too often makes it attractive to move their factories and distribution centers, as well as most of their non-executive jobs to these other states. I witnessed this trend in my career as a corporate and investment banker in southern California.

Whitman is right to think that the new governor needs to find ways to reduce state expenditures to help balance our recurring budget deficits and laying off people whose jobs are not really needed is certainly one way to do that. But laying off as many as 40,000 of the current total of 239,000 employees seems drastic. I think voters should have an idea of where those 40,000 workers are employed and what would be the financial and service consequences of laying them off when all the relative costs like pension obligations and potential termination litigation expenses are tabulated.

Brown's long experience in government in California and intimate knowledge of leaders in the Legislature and how issues are solved or not solved are significant positives for him, although it's also true that a "fresh approach" by a business experienced outsider such as Whitman might work well. Brown will most likely get more support from the increasingly important Hispanic block of voters, given the incident with Whitman's maid and the fact that he supports a path for citizenship for the illegals under prospective immigration reform legislation. I also suspect he will have most of the support from California's environmentalists, given his track record and Whitman's positions on the Global Warming Solutions Act of 2006 (AB32) and Proposition 23, which seeks to suspend implementation of AB32 relating to air pollution controls.

The business community, most Republicans and many Independents are likely to support Whitman because of her perceived strengths in dealing pragmatically with improving the economy, contributing to job growth, being effective in cutting expenditures and moving the state toward a balanced budget. These perceptions are reasonably justified and will have an adverse impact on Brown's prospects. However, she may well have a difficult time getting needed legislation through the Democratically controlled Legislature, depending on the composition of this body after the upcoming elections.

There are not likely to be any new campaign surprises to impact the election between now and November 2nd. As is often the case, the outcome will largely depend on the components of the voter turnout, only 61.2% in 2008, and how Independents and political moderates decide to vote. Both candidates have the ability and potential to be effective governors, but whoever wins needs to prioritize improving the state's economy with a much more acceptable unemployment rate, restoring prudent financial management, and fixing our K-12 public education system. The winner also badly needs a State Legislature whose leaders will pragmatically collaborate with the governor in solving these issues. It will largely be up to Independents and moderates to decide which candidate can best deal with California's priority needs.