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While helping to frame the United States Constitution, James Madison wrote “if men were all angels, no government would be necessary.” In his opinion, good government depended upon the concept that individual self-interest shouldn’t undermine the public good.

The incoming Trump Administration will place an unprecedented number of billionaires and successful business people in leadership roles — many of whom will have an ongoing personal financial interest in the country’s economic and foreign policies. Where to draw the line between the personal interests of those serving in government and the common good is on the mind of many.

Insights gained by growing a business help create concrete understanding of the many impediments and opportunities that shape success. For instance, a company navigates many federal, state and local regulations all while management motivates and develops employees, sells to customers and shares a clear and inspiring vision.

For complex industries, business leaders have a deep understanding of their inner workings. For a thorough explanation of how a complex financial derivative works, or how machine learning can replace a customer support employee, ask the leader of the related business. The insights gained from business success and mastering the complexity of key industries certainly makes a successful person an attractive candidate for managing a federal agency or creating new policies for the economy.

Moreover, wealthy Americans are seen by many as less likely to use a government position to seek personal advantage. They are seen as incorruptible because they can serve the public interest free from the need to gather resources to provide for their family.

So insight, experience and perceived incorruptibility could justifiably lead us to conclude that having more business leaders in government is a good thing. Indeed, many who voted for Donald Trump were drawn specifically to his business success.

The big issue, however, is not qualification, it is the degree to which business people in key leadership roles will be willing to disavow the potential financial self-interest in their government decisions.

If James Madison were alive today, he would likely still ask whether our business leaders are “angelic” enough to serve the public interest.

For close to 250 years, our nation has been governed with Madison’s words in mind. Americans agree that without rules of conduct and disclosure, there’s a risk a political appointee’s or politician’s self-interest takes precedence public interest. Here in the nation’s capital, we are familiar with Federal Acquisition Rules disclosing and avoiding personal gain in contractual transactions, but there are many other examples. Both our economy and government are based on the premise that self-interest must be disclosed and avoided when individuals are asked to exercise their judgement for the good of others.

Unfortunately, Congress and the incoming administration are clearly signaling that principles of disclosure, or the avoidance of personal profit, are of less concern than previously agreed. We are going to have to trust our leaders to find their better nature. However, in an environment where most Americans do not trust our political institutions, having faith might be the toughest challenge we face.

I believe that there is a large opportunity for thoughtful government and new approaches represented by the inclusion of business insight. But, we should expect that those from the business community who choose to serve also understand the enormous responsibility that each will carry — the responsibility to put the public interest ahead of their own.

Will an administration led by business people be the solution for our nation? Only if they are all angels.

Column originally posted in WashingtonPost.com.

Video: SiriusXM’s Forward Thinking Radio, January 9, 2017

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My prediction of the United States financial markets in 2017 is a mix of good news and bad news: When markets are chaotic, there are often large opportunities — and they are usually found in unexpected places.

The biggest change in the coming year is that investing in the United States will not be an obvious choice. Over the last few years, international concerns such as China’s growing debt bubble and the possibility of the demise of the Euro have made investing in America appear attractive in comparison. While these threats have abated somewhat, our political risks have dramatically increased.

Meanwhile, expressed policy priorities of the incoming Trump Administration are creating inflationary expectations, causing U.S. market interest rates to trend higher. Expect these pressures to increase due to an erosion of federal fiscal restraint and if, as suggested, there are trade restrictions put in place between China and the United States (or elsewhere). These factors will create an unwillingness on the part of international investors to purchase U.S. government debt, which will drive our interest rates higher.

Thinking about refinancing your home or taking on long-term debt to finance your business? Do it now. Debt will be significantly more expensive by year end.

The U.S. equity market is harder to predict. Certain businesses are likely to benefit from a lessening of regulation, particularly anti-trust regulation. Look for continued consolidation of market power in media, carbon-based energy, transportation and telecommunications. Businesses that depend on complex value chains are less likely to be happy with trade restrictions. All these factors suggest a stock market that will move sideways at best. However, the nature of these businesses will not be the only relevant factor.

Expected tax cuts for both individuals and corporations will undoubtedly create new liquidity for financial investment. As we saw with the Bush tax cuts, cutting taxes for people and businesses that are already satisfying their consumption with existing cash generally results in these tax cuts becoming financial assets and not spending on consumption of things or services. This means that the effect of tax cuts on the economy will be muted at best, but the impact on financial markets will be large.

Investment patterns over the last 20 years show that as financial assets of the well-off increase, the portion of these assets being managed by financial managers also increases. A result of this flux of new money in the hands of financial managers will be an increase in market volatility. Simply put, the more money being managed to generate short-term returns, the more markets are affected.

Turning to technology innovation, there will be significant business interest in technologies that increase worker efficiency. The incoming administration is shining a bright light on companies opting to shifting jobs overseas, so businesses seeking margin improvement will need to consider technology to lower overall effective labor costs. This will be a very strong driver for start-up innovation in the coming year.

Overall, investing and starting a business in 2017 will be complicated. There will be ample capital available for anyone demonstrating a high-growth opportunity, but capital for run-of-the-mill business expenses will be significantly more expensive. Investing in the stock market will require a strong stomach, and a willingness to take a long-term view.

America asked for a president to shake things up. The financial markets certainly won’t disappoint.

Column originally posted on WashingtonPost.com.

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The interplay between politics and the macro economy has shaped our business environment since 2008, often in adverse ways, and will continue to do so.

The last eight years have been marked by a toxic partisan divide between Congress and the president. This adversity often resulted in politicians engaging in last-minute brinksmanship — threatening to default on debt or shut down the government — to extract concessions in an ongoing ideological battle.

Heading into the new legislative session, many have already suggested that it is now the Senate Democrats’ turn to use the tactic most recently employed by Republicans to inhibit presidential action: the filibuster. The parties have flipped, but the gridlock that has prevailed will remain.

Americans are frustrated with the brinkmanship, and this electoral cycle reflects that, according to polls. Some figure the solution is now simple: take away the filibuster through a change in Senate rules, and allow a simple Senate majority to govern all decisions. When coupled with a Republican president and congressional majority, this would break the ongoing deadlock.

The financial markets are clearly expecting this to be the case, anticipating significant tax cuts, healthcare changes, lax regulation and higher inflation. They are counting on Republicans’ expressed policy intentions. And markets don’t care about ideology, they care about predictability.

The question now is: Will calls to eliminate the filibuster be successful? I have sincere doubts. There are a number of long-term Republican senators who respect the customary practices of government, and recall the filibuster’s usefulness when they were in the majority. It’s unlikely they will vote to change a tool that has been a long-standing protection against simple majority rule.

So the threat of gridlock remains — not necessarily along Democrat/Republican ideological differences, but along those developed within the Republican party between Tea Party conservatives and establishment Republicans.

It will become apparent in 2017 that Tea Party conservatives’ expectations will not be met. For example, establishment Republicans will be less willing to take health care benefits away from working Americans, cut social security or turn Medicare into a voucher program. Look closely for conversations that have already begun in the Republican Party for how to deal with the Affordable Care Act or the funding of Planned Parenthood, for early indications of this coming ideological divide.

Meanwhile, Democrats will have little interest in crossing the aisle to work with establishment Republicans, choosing instead to watch further fractures within the GOP.

My prediction is that the resulting dysfunction may at first appear to be along party lines, but that by the middle of next year, the more profound split will be within the Republican party itself. How that split is addressed will be the largest factor shaping our country’s prospects for 2017. Anyone hoping for a quiet year will be disappointed.

The discord will make investing in the stock market next year riskier and the federal government’s borrowing costs jump.

Next week, I’ll offer my reasons for these conclusions and other likely trends in the financial markets for the coming year. Some of them will be due to government dysfunction — but not all of them.

Column originally posted in WashingtonPost.com.

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Russian hacking. Did it affect our election? Did it happen at all?

The use of force by a nation is an extension of political policies. For millennia, nations have engaged in war as a tool to achieve national ends, or sometimes as an end in itself — waging war to create a national political consensus or to deflect attention from ineffective domestic policies.

Until World War I, wars were fought between military forces. Populations were largely not active participants. However, starting in World War I, direct attacks on citizens became part of warfare with the bombing of London by Germans.

This addition of civilians as a direct target underpinned war strategies in World War II and beyond. Now, the balance of terror — the possibility of a direct and enormous attack on a nation’s citizens — is the basis of war and its deterrence.

There have always been rules for how nations engage in war through international treaties and customary practice. As the calculus changed and force projected onto civilians became an accepted practice, a global consensus emerged for how and when this would occur.

There was an expectation of proportionality: conventional force was to be met with conventional force and nuclear weapons with nuclear weapons. National security — the process of protecting American citizens — functioned within these clearly described expectations. War was to be waged by nations through their militaries.

However, over the last 15 years, we have seen this international consensus erode significantly. For example, we struggled with the correct military response to the September 11 attack on the World Trade Center carried out not by a nation, but by a terrorist group. More recently, Americans were unsure how to react when the North Korean government cyber attacked the servers of Sony, a private company.

Enter cyber warfare. Each day we are more reliant on software and the Internet as the backbone of our economy, and that leaves us vulnerable. Consider the chaos that would be caused by a widespread outage of power that lasted weeks. Or, the incalculable cost of a widespread disruption of our financial markets or records. Imagine the cost to our national discourse if the information we rely on is tainted by intentional misinformation fostered by a national adversary. Each of these harms could occur through nothing more than the use of software and computing power.

We have grown up with the expectation that America’s most existential threats would come from other countries using physical force against us. We are armed and have adopted policies for how our military would retaliate if attacked. We have a plan for how to react if another country dropped a nuclear bomb on Washington, or if it sent paratroopers to capture an oil pipeline in Saudi Arabia. This is the basis of our national security — because our adversaries know in advance how we would react, they are deterred from attacking us through use of force.

But, what’s our plan if the use of force isn’t physical force at all, but the use of software and hacking skills? Do we have a plan when the attackers themselves might be acting on their own and not part of a country’s military plan against America? What is our plan if the attack is on our businesses and citizens directly?

Deterrence — the promise that force will be met with force — is the backbone of our national security. Clarity on what constitutes warfare in the 21st century must be determined, and expectations of our likely response to a cyber attack must be clearly described to both friend and foe. Failure to do this will only embolden those who wish to do us harm.

 

 

Full column can be found at WashingtonPost.com.

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It was recently argued that as a nation we have lost our ability to create new industries out of big ideas, meaning fewer high-paying jobs and weak economic growth. As someone who converts ideas in actions for a living, who is working to make sure the region does not lose its innovative edge, I find it is not our failure to have big ideas that threatens us, it’s that we don’t capitalize on our big ideas.

We tend to think that our national economy is best left to the free market. Many of us equate regulation and government intervention as inhibiting the free movement of ideas, capital and labor. Stock market values of companies in regulated industries have increased dramatically over the last month as it becomes clearer that President-elect Donald Trump is committed to lessening government involvement. Some predict accelerating economic growth and job creation.
However, a blanket reticence to regulate may impede our ability to convert new ideas into industry. When it comes to creating conditions for new industries, the government has a huge role to play.

Our economy does not grow at a consistent rate. Its growth rate expands most dramatically during an industrial wave — meaning a period where a new technology is broadly adopted, changing the fundamental underpinnings of employment, entrepreneurship and capital. Consider intercontinental railroads, automobiles, electrification, radio, television, semiconductors, software, the Internet, wireless communication and mapping the human genome and the effect each had on the creation of commercial opportunities. Each of these technologies fostered industrial waves.

The federal government’s role in creating the conditions for industrial waves is demonstrable.

For example, the adoption of the intercontinental railroads was driven by a desire for a mechanism to transport federal troops around the nation. The government ensured that standardization of trackbeds occurred, created time zones to keep trains on schedule and adjusted freight rates so they wouldn’t choke farmers and businesses relying on railroads to transport their goods.

We can thank the federal government’s breaking up AT&T’s longstanding monopoly in telephony for our rapid adoption of new telecommunications technologies, the growth in consumer alternatives for long distance, and wireless. In fact, the underpinnings of the Internet and mobile that have driven these new alternatives were funded and fostered by research and development from our Department of Defense.

Ideas becoming industries are at the heart of disrupting the status quo. Just like an old tree must fall for the sapling to find the sun, incumbent companies must step back so others can rise. However, large companies will not simply cede so others can succeed, and those profiting from the status quo will not merely stand aside to allow the future to emerge. Interestingly, the federal government is often the woodcutter clearing that forest, or the gardener protecting the saplings.

Look at current technological ideas that that could emerge as new industrial waves: artificial intelligence, alternative energy and conservation, artificial life or proteomic medicine and see also large established businesses happy with the status quo which are often standing in the way.

Sure, we want a market free of government intervention, but we might be creating conditions that inhibit our growth. Sometimes government intervention is both necessary and desirable, and it is our duty to remind the incoming administration of that distinction.

Column originally posted at WashingtonPost.com.

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Since the financial crisis of 2008, a recurring theme in our national debate over the role of government spending has been the imminence of currency devaluation and inflation due to chronic budget deficits.

Suddenly, as President-elect Donald Trump prepares to work with Congress to cut taxes and dramatically increase the federal budget deficit these same voices are muted.

Shouldn’t we be hearing those same shrill voices now?

They warned us that inflation was unavoidable if government spent money to reinforce an economy that was on the ropes after a financial calamity. They predicted that inflation was inevitable if we invested in infrastructure. They portrayed the Obama Administration as profligate.

The cudgel used to support their message was that financial markets would punish the United States through higher interest rates and a lessening of investment activity. That message clearly carried weight. The federal budget deficit fell consistently during the Obama Administration. Federal employment grew at rates below any Republican administration in modern times.

Through it all, inflation stayed muted and interest rates rested at historically low levels. Statistics proving these assertions are there for all to see; the inflationary crisis simply didn’t occur.

Those who had loudly lobbied for fiscal restraint claimed credit.

But there is a counter argument. The global economy is in a deflationary state — not inflationary. Subdued economic conditions around the world provided a ready buffer against any inflationary pressure that might have been created by a larger federal budget deficit. These conditions exist to this day.

Even skeptics agree that free markets don’t lie. Financial markets — buyers and sellers of the lifeblood of commerce — provide a real-time dispassionate view of expectations for inflation and future growth. In this, the deficit scolds are correct.

The punishment of the financial markets that has been threatened for the last eight years may now be closer than ever. Interest rates on mortgages for homeowners, bank loans for small businesses and personal revolving debt are increasing. Nothing suggests this is a short-term phenomenon.

Meanwhile, the stock market has gotten a boost of adrenaline, as regulated industries such as financial services appear likely to benefit from a period of lower government oversight. However, interestingly, technology companies — the source of substantially all our net economic gains over the last eight years — have lagged.

Financial markets are telling us to expect more inflation and less economic growth.

Where are those voices that so loudly reminded us to limit our federal spending? Some remain, but many have changed their tune.

Now these voices state that a growing federal budget deficit will not be a problem. They make a distinction between deficits due to higher government spending and deficits resulting from tax cuts. They argue that tax cuts will pay for themselves in growth and subsequent deficit reduction. This is not an assertion supported by historical economic data; neither the Reagan nor Bush tax cuts paid for themselves. More importantly, the financial markets don’t appear to agree.

As someone who works with small businesses, I can attest that rising interest rates and inflation would be a big problem for business owners. They are also the enemy of those on a fixed income or with minimum wage jobs.

The markets just might be telling us that the incoming administration is creating conditions for an economy that will harm ordinary Americans. Markets don’t lie. Shame on us if we don’t pay attention.

This column was originally posted at WashingtonPost.com.

 

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Alongside the well-established Thanksgiving traditions of eating turkey and playing touch football exists Black Friday deal hunting. We love a deal, and we really don’t care where that bargain comes from. Incoming President Donald Trump wants to bring manufacturing jobs back to America but our love for cheap stuff might make it impossible.

When cost is not an issue, Americans are very patriotic. A recent survey by Consumer Reports shows a substantial majority asserting willingness to buy an American-made product over one manufactured abroad.

But what is an American-made product? Most of what we consume — electronics, clothing, automobiles and packaged goods — involve multiple steps of production and combinations of raw materials, components and labor.

The value chains, as they are known, are complex for many popular American products. Even for many foreign-manufactured products, a significant portion of their economic value inures to American workers. For example, a recent study by the Wharton School shows that 40 cents of every dollar of imports from Mexico went to American businesses. Another analysis shows that 75 American companies manufacture components incorporated into an iPhone imported into the US from China.

These small data points are part of a larger trend: the merchandise we snatch up on Black Friday — even the imported stuff — usually incorporates the productive activities of our citizens. Identifying where they are involved is salient: from creating and manufacturing complex components to selling and servicing completed products.

Jobs in the middle — the combination of components and American intellectual property — are the jobs being done elsewhere. Companies choose to structure production overseas for a variety of reasons: Labor rates are cheaper, workers have less negotiating leverage, workforce conditions are less stringent and international tax rules encourage allocation of portions of the value chain outside of the United States. In other words, companies are being encouraged to use non-U.S. workers to make the products we consume.

Supporters of international trade point out that this allocation of labor — the separation of roles between the workers who create things, and those who build them at scale — allows for nations and businesses to specialize and be more efficient. This efficiency results in lower prices for the consumer or higher profits to the creator.

And therein lies the reality of the issue. Our workers miss out on manufacturing jobs because the cost of their labor is comparatively expensive. It’s not that we can’t do more manufacturing here, we are simply making a choice not to.

We must accept that many of our products would become more expensive if we kept a bigger chunk of the value chain in the United States. Try telling that to a Black Friday shopper.

Consider how resistant many of our largest employers and political leaders are to raising the minimum wage or encouraging unionization. Would they be willing to pay more to use American labor, or would they expect our workers to be satisfied with the wages and workforce conditions that prevail in India, China or Vietnam?

While American consumers say they want to purchase American-made products, they will only do so if they are priced the same as a foreign-sourced alternative.  A recent Associated Press/Gfk poll shows 71% of Americans would not pay more for a U.S.-sourced product if a cheaper foreign-sourced alternative were available.

Shoppers at the checkout with a flat screen TV or a cashmere sweater for Dad surely realize that low price comes with a cost. We talk a great game for bringing manufacturing jobs home. But are we truly willing to pay for it?

Originally posted in WashingtonPost.com

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Our 45th president will be a businessman who promised to change government, and our nation is poised to find out whether change management principles applied in commerce can work in public office. After years of working to change how government works in relation to technology and innovation, I have some hard-learned perspectives.

Changing large organizations is a tough challenge. Most organizations reach a point in their operational history where they lose their way, and their methods no longer provide the profits and growth necessary for survival. The reality in the private sector is that a business must have profitable growth to survive. Growth creates opportunities for employees and wealth for the owners.

The subtext here is highly important. Growth in business creates personal satisfaction for those involved who feel like what they are doing matters, and that their daily activities have consequences. And, conversely, stagnation and decline cause dissatisfaction and accelerate business decline.

To grow a business, impediments such as unproductive employees, products that are no longer compelling, antiquated technology or unappealing working conditions must be removed and overcome. The status quo must be disrupted.

Organizational change requires a few things to succeed. First, a compelling vision for others to follow. Second, a targeted core group of individuals within the organization excited about the shared vision. Third, a way to restructure the environment around employees to reinforce company goals. And, lastly, the ability to encourage those who do not adapt to change to find employment elsewhere. Simply put, you can change an organization by rewarding employees who “get with the program” and trim those who don’t. That is the nature of business.

Massive change of large business organizations is possible. Consider how IBM modified itself from a main frame computer business to a consulting services and software provider. Or, how Netflix went from a DVD rental business to an over-the-top content provider challenging the primacy of traditional networks and cable companies.

However, changing government is a very different thing, with two types of issues: the mechanics of government —how government benefits such as programs, entitlements and rules are provided to society, and government itself — what is appropriate for government to do.

Resolving both issues involves the interplay of politics and policy. However, only the first is suitable for a business approach to organizational change.

Business principles of organizational change to government were recently applied to the Pentagon’s DIUx or the GSA’s 18F innovation programs. However, the take-it-or-leave-it attitude to resolving the question of what government should do is not an option — it’s not in the nature of a representative democracy.

The U.S. Constitution provides for separation of power and delegation of authority for a reason: we can’t just fire our citizens if they don’t agree with a vision. While that might be great reality television, it’s not how our country works.

This very important distinction is why being the chief executive of a company is not the same thing as being the president of the United States. Change is possible, but it requires finesse and the utmost respect for how government works.

Read column at WashingtonPost.com.

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