Monday, February 23, 2009

A taste of Friedman's medicine... "Let America Revive NOT Survive!"

Tom Friedman wrote an OpEd in his column in the New York Times the night before last which started like this:

Reading the news that General Motors and Chrysler are now lining up for another $20 billion or so in government aid — on top of the billions they’ve already received or requested — leaves me with the sick feeling that we are subsidizing the losers and for only one reason: because they claim that their funerals would cost more than keeping them on life support. Sorry, friends, but this is not the American way. Bailing out the losers is not how we got rich as a country, and it is not how we’ll get out of this crisis.

Darn Straight!

I did a small calculation on some assumptions:

- Assume an average startup needs between $4-10MM of capital ($7MM average) to prove out its model. This could be hotly contested, as it could be less or more, but we are making an assumption here for the middle part of the curve.
- Assume the utilization of that sum over 3 years means an even split and if there is NO revenue then that is $2.3MM per year
- Assume for the people who work in this facility, (i.e. those that staff the LM facility, HQ Labor pool and other SG&A type employees) that their salaries probably represent up to 40% of the budget for any year.
- Assume this 40% means means that there is about $1MM in salaries being paid carrying about 22 people on payroll at an average of $45K per year. For some Wall Street Bankers, this salary may seem low, but for an average AND for a startup it is probably right on. You can live on the wage, and it is not forever as you prove out the model.
- Assume that the "job multiplier" (i.e. how many jobs are created around a business when it come to town) is around 2. This can be as high as 3+ for something like the auto industry, but again this is an average.

- Therefore this means that 44 people would be employed full time each year for 3 years on the startup money alone invested in one average startup, trying to be the next Google and the next Mary Kay. 44 jobs.

Here comes the kicker. Some in our government are thinking about giving GM and Chrysler another $20BN on top of what we have already given them, which is about $22BN in loans and guarantees to the Big 3 making this about a $42BN price tag. If instead we simply did not make these loans as Friedman suggests and put this money into startup companies at the average dollar figure suggested above ($7MM total over 3 years) and earned a little interest on that money while it was being drawn down, say $2BN at treasury rates, then $44BN could spark 6,286 companies trying to be the next Google and the next Mary Kay.

That would be 6,286 X 44 Jobs per year = 276,571 jobs added to the economy each year for three years in place of the Big Three being "saved".

...276,571 jobs added to the economy each year for three years!
......276,571 jobs added to the economy each year for three years!
.........276,571 jobs added to the economy each year for three years!

How many months will it take the Big Three to blow through their first $18BN?...I think that it will be less than 3 months.

Again, as a country we could do that OR as Friedman suggests with simply the money that we are spending on the Big 3 (NOT altering the remaining $767BN in the stimulus plan)....

276,571 jobs added to the economy each year for three years.

GM already employs less than this number and is getting smaller every month.

This number of 276,571 may not "take up" the 3MM jobs that people predict would be lost if the Big 3 go out of business, but what if the Big 3 were simply allowed to go through bankruptcy? Then they could reorganize like other companies do; borrow money from non-governmental agencies (like they always have); AND continue to do business (employing a reduced, lean team) with 6,286 other new businesses in America at their flanks trying to become the next Google and Mary Kay....and maybe even the next GM.

As a taxpayer, I think that Friedman may be right. He did not quite spell it out this way, but the numbers are probably close. I would love to hear your thoughts, and if you agree, please send this argument to some others who might enjoy thinking about it. Our entrepreneurial spirit and reputation for growth in this country depend upon it.




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Ariel Wilson said...

Ambitious individuals with crazy dreams – that’s what has helped America reach where it is today. And what America needs the most is a revival of entrepreneurial spirit. I see many talented individuals who have to settle with offering help with dissertation writing or get some freelance projects, here and there. The system needs to wake up and provide them the opportunity to make it big – the sooner the better.

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