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Applying the Martinez Mantra to three big public policy issues

By   /   Friday, February 24th, 2012  /   Comments Off on Applying the Martinez Mantra to three big public policy issues

A look at three big public policy issues through the lens of the Deckers exec’s rule.

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I’m becoming convinced that Deckers Outdoor Corp. CEO Angel Martinez had it right in many, many ways when he said “what got you here won’t get you there” was the new mantra for modern managers.

What happens when we apply the Martinez Mantra to a few bigger problems? Here’s a look at three big public policy issues — the unemployment mess, the Volker Rule and the deficit debate — through the lens of the Deckers exec’s rule:

The unemployment insurance system we have was last reformed decades ago when lots of workers were laid off temporarily in manufacturing downturns. It clearly wasn’t designed for The Great Recession and the permanent destruction of millions of jobs. In the worst-case scenario, the system offers as much as $450 per week for up to two years to people who let their skills erode while they surf the Web or blog about their former employers. That’s more than $40,000 with no strings attached, other than occasionally reporting in to the EDD on your “progress” in looking for work.

For the employer, it’s a total disaster. Unemployment insurance costs in California amount to more than $400 per employee per year and many companies have seen their unemployment insurance reserves depleted due to layoffs. The state of California owes billions of dollars to the federal government, which means costs will go up for years to come.

Reforming unemployment insurance will mean converting it into a work-training program that requires people to enroll in community colleges or other training in order to continue to get extended benefits. I also like the German system, which allows employers facing a slowdown to convert full-time employees to part time until conditions improve, with unemployment payments picking up some of the lost wages. The recently passed payroll tax cut makes some modest reductions to unemployment benefits, but those are not real reform.

Next, the Volker Rule. It’s easy to look backwards and about who caused the financial crisis. But one thing can’t be debated: What got us to where we are right now was the partial nationalization of all of our investment banks. In order to keep them solvent, Goldman Sachs, Merrill Lynch, the remnants of Bear Stearns, Morgan Stanley and others have been converted to or merged with bank holding companies backed by the Federal Deposit Insurance Corp.

This causes one huge problem. Traditional banks are not designed to earn more than 15 percent on equity — if they do they are taking on too much risk for a company that operates with a government guarantee. Investment banks, which risk only shareholder money, typically maximize risk in order to get the biggest return.

The Volcker Rule, with its limits on proprietary trading, is really a brake on risk-taking by once high-flying investment banks. Investment bankers hate it because they want to take more risks, collect big bonuses and keep their government guaranteed deposits. That’s not any way to run a banking system and former Fed Chair Volker knows that. To get us there under the Volker Rule, the banks will have to drop their bank holding company status if they want to earn more than 15 percent on equity.

Finally, the tax and deficit debate. What got us here is a tax system that’s old, creaky, complicated and won’t generate enough revenue in the good years to meet the demands of a slimmed-down entitlement regime.
What will get us there is reform along the lines of the Bowles-Simpson Commission, a reform that was left an orphan when the White House refused to endorse it and the GOP refused to accept its demand for increased revenue.

Now we are debating the so-called Buffett Rule, aka the millionaire’s tax, named after billionaire Warren Buffett, who argues it’s unfair for his secretary to pay a higher tax rate than he does. The Buffett Rule feels to me like a remix of Bowles-Simpson, but without entitlement reform — smart politics, perhaps, but poor economics.

The framework for getting the American economy truly into the 21st century economy exists. It requires a new structure for unemployment, a better way to manage risk in the financial system and a Bowles-Simpson-like formula that trades off tax hikes and entitlement reform.

But before we can take meaningful steps forward, our leaders have to accept the Martinez Mantra  that “what got us here won’t get us there.” We close with my grandkids’ favorite refrain: “Are we there, yet?”

• Contact Editor Henry Dubroff at [email protected].

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