Obama Unveils Economic Plan

After much anticipation, Democratic Presidential Candidate Barack Obama revealed parts of his economic plan in an interview with The Wall Street Journal. As reported in their June 17, 2008 article “Obama Plans Spending Boost, Possible Cut in Business Tax,” Bob Davis and Amy Chozick highlight some of the major proposals in Senator Obama’s plan.

Senator Obama’s plan focuses on three proposals: significant government spending on energy projects (infrastructure projects are included in the Senator’s plan), tax code reform to “narrow the gap between winners and losers in the U.S. economy,” and a reduction in business taxes.

The first leg of the plan, energy projects, is intended to spur the economy by providing work for the many unemployed. Included in these projects would be highway construction, along with power plant and other energy-related construction. Senator Obama proposes spending $15 billion over 10 years on these projects, paid for with revenue from a carbon trading system. The proposed trading system is projected to generate revenue of roughly $100 billion by providing a platform for trading pollution permits. The Senator also plans an infrastructure reinvestment bank which would spend $60 billion on high-speed rail service and improved energy transmission, among other projects. To further encourage development in the energy sector, Senator Obama wants to provide funding to “middle stage” companies invested in new energy technologies. In his view, these companies, which find themselves at a stage between innovation and commercialization, often struggle to raise the capital necessary to move their products to commercial viability at the same time that their products could provide the next step in the energy puzzle. (This program is similar to one under the Clinton administration which faced strong headwinds from Republicans and never expanded beyond small-scale projects.) Senator Obama also intends to establish a “green technology” fund to promote environmentally-friendly development.

For his part, Republican Presidential Candidate John McCain agrees with Senator Obama on the need for a cap and trade system, though his would be much smaller in terms of projected revenue. As for green technology and middle-stage funding, Senator McCain feels that Silicon Valley and venture capital have things covered. But I digress…

Senator Obama proposes a wide variety of changes to the tax code, focused on equalizing the tax burden faced by individuals and corporations. For starters, he would like to eliminate President Bush’s tax cuts for those families making more than $250,000 while maintaining them for those making less than that threshold. He would also eliminate the capital gains taxes for start-up companies, so that these entities can “accumulate capital [and] reinvest profits…to the point that they stabilize.” (Unfortunately, Senator Obama hasn’t defined a startup company.) For individuals entering the public service sector after college, the Senator proposes $4,000 annual tuition credits on the individual’s income tax return. His final proposal would eliminate income taxes for those individuals over the age of 65 who make less than $50,000 annually. The Senator anticipates that these changes will help “level the playing field” and allow him to reduce corporate tax rates as well as maintain the capital gains rate reductions President Bush implemented. In the article, Mr. Obama asserts “How much you pay in taxes as a corporation a lot of times depends on how good your lobbyist is.” His proposed changes aim to eliminate the lobbyist effect from calculating tax rates.

Early in the article, Mr. Obama states “Globalization and technology and automation all weaken the position of workers.” Many of his proposals aim to encourage technology development for the assistance and empowerment of workers, demonstrating his attempt to use technology to strengthen employees rather than weaken them.

One small item of note that could be lost in the sprawling article: Senator Obama’s plan to subsidize high-speed internet access as part of his infrastructure reinvestment bank proposal.

So what does all of this mean? We’re finally seen a bit of what Senator Obama’s economic policy may be. He has some interesting ideas, some new and some recycled. I think one of the biggest things his proposal shows is that he is focused on helping the average American in a time of increasing economic pressure and uncertainty. He has woven his “change” mantra into the proposal with some new, somewhat radical spending plans, while showing his critics that he can also learn from his predecessors by rehashing some long-debated concepts and ambitions. I am very interested to see the further details that will invetitable emerge in the coming months regarding Senator Obama’s economic policies.

Health Insurance

Check out this article in today’s Wall Street Journal describing recent graduates’ tactics for extending their health insurance after graduation. For those out their not fortunate enough to have insurance through their employers, there may be some useful tips here. Health insurance is sure to be a major issue facing our generation as we graduate and enter the workforce. With the problem already facing many millions of Americans, a solution is needed soon as many more enter the ranks of the uninsured.

The article, entitled “Graduates Get Creative to Find Health Coverage” was written by Mary Pilon and appeared in the June 17, 2008 issue of The Wall Street Journal.

Fighting to Survive in a World of Changing Accounting Rules

As reported in today’s Wall Street Journal, financial firms just can’t catch a break from the folks at FASB. David Reilly writes in his Heard on the Street article “Assets Get Harder to Shake” that the FASB last week proposed new rules regarding assets that companies securitize and sell to other institutions. Currently, when the assets are securitized and sold off, they are removed from the books of the company that sold them. Unfortunately for the financial services firms, they often retain some interest of one form or another in the securitized assets. This retained interest, say in the form of mortgage servicing, could force the investment vehicle back onto the books if, under the new rules, the entity that sold the vehicle is deemed to have retained significant control over or liability for its assets. Mr. Reilly doesn’t cite any estimates of how much could come back on the books, but he does note that Lehman Brothers securitized more than $700 billion in assets between 2003 and 2007.

How FASB Caused the Credit Crisis

One of the most difficult aspects of the current economic malaise to explain has to do with complicated accounting rules dealing with a concept known as fair value. The Financial Accounting Standards Board, or FASB, issued two standards which radically changed the way certain financial transactions were recorded. Traditionally–with few exceptions–assets and liabilities were recorded at their historical cost. FASB Statements 157 and 159 allowed companies to record assets at their fair, or market, value. As early adoption of these standards took place, companies could determine their value based on what the market would pay for them. The problem with this idea is that the market for these securities was created by at least one party to any of these transactions, thereby impairing the independence of the transaction. For a while this method worked just fine, until the markets for securitized mortages and other complicated collateralized debt obligations (CDOs) siezed up. As soon as the market for the assets dispappeared, the accounting rules for them changed dramatically. Assets that were once considered Level 1, or based on “quoted prices in active markets,” were now downgraded to Level 3, where only “unobservable inputs for the asset or liability” exist (FASB Statement No. 157). Companies were forced to rely upon complicated, and often proprietary valuation methods, based largely on “black box” computer models no human could ever hope to understand or explain. Large writedowns result when the asset’s valuation method changes and the certainty of that valuation comes into question. While the market may have allowed for and even encouraged inflated asset prices (yes, we’re talking bubble), accounting rules do not. This is another cause of the substantial writedowns most banks have announced over the last year.

To recap: Bear Stearns announces is has pumped cash into two failing hedge funds. As a result, the market for mortage-backed securities and other CDOs evaporates. Thus, accounting rules for those securities change and massive writedowns ensue. Hence, accounting standards caused the credit crisis.

A Bizarre Approach to Animal Control

“As bomb scares go, this one might be the most unusual for local police.” So opens the Hartford Courant’s Courant.com article about a bomb scare in Simsbury, Conn. It seems that someone in a residential neighborhood was having problems with bears and decided to take matters into his or her own hands. The individual’s solution: stuff a whole roasting chicken with a pipe bomb. Police responded, detonated the chicken, and are now looking for the culprit.

I’ll be sure to follow up with this story, just for the sheer hilarity of writing about pipe bomb chickens.

The ‘Green’ Economy

I’ve recently been hearing a lot more about the green economy. Not surprising, given the changing views on climate change. This new economy could bring about opportunities for Gen Y to couple its entrepreneurial sprit with the awareness and activism the generation has already demonstrated. Just imagine what could be done about climate change if Gen Y put the same energy into innovation that it put into such disparate interests as the presidential race (namely the Obama campaign) and customizing our iPods. And all while exercising our hard-sought-after freedom.

Gen Y Can Reverse the Offshoring Trend

That’s right. According to Ken Gronbach, who spoke at the Connecticut Expo for Business on June 5, 2008, Gen Y has the chance to reverse the trend towards outsourcing. Mr. Gronbach, a futurist and demographer, sees the entrepreneurial nature of Gen Y leading a trend towards small business fulfilling needs that are currently being sent overseas. He cites the fact that “…we have the expertise [and] we have our own homegrown labor force for the first time in 20 years…” as support for the changing trend.

WNPR/Connecticut Public Radio‘s Harriet Jones first reported on this story last week in her piece “CT Expo for Business Optimistic, for the Long Term.”

More information about Ken Gronbach can be found at his web site, www.kgcdirect.com.

Where I Left Off

Last year, I suspended posting by saying I had just been assigned to a new client, which would be keeping my busy. Nearly a year later, I’m trying my hand at this again. The project that took me away from this last year was of the highest level of service (accountant speak for most complicated) offered in my industry: the audit. Audits are rare for my firm, largely due to the cost and relatlively little need among our clients. This year, I will begin this journey again with a new project, of a very different nature. Look for more on this new project in the coming weeks.

It’s back

Last summer, I started a blog of the same name. Then, ADD kicked in. I’m hoping this attempt may have some staying power. Check out the archive to get a flavor of what’s to come.

My Time to Shine

We’ve started work on a new client this week, and so I’ve been busy, hence the dearth of posts. More on that in the coming weeks. In the meantime, check out the August 20 & 27 issue of BusinessWeek, which focuses on “The Future of Work.”