October 2017

I have been wondering recently whether the current strength of the stock markets is attributable to expectations of tax cuts. I decided this week to check in with local financial market experts and find out.  

They uniformly told me that the biggest reason for the rise in the equity markets is economic fundamentals. For example, Anne McCabe Triana, president and CEO of the Reston wealth management firm Curo Private Wealth, told me “stock prices are definitely elevated,” but there were objective facts supporting valuations. The equity market was not a bubble, and reflected instead “low interest rates and an increasingly positive business environment.” Brad Smith, chief investment officer at MTX Wealth Management in Reston, pointed to continued corporate earnings growth and low unemployment as additional contributing factors. 

I did hear from these experts that the possibility of federal tax cuts was contributing to some recent acceleration in stock market gains. John Devine, partner and strategic advisor at Brown Advisory, thought that “optimism about tax cuts” was reflected in the market, but that “it is always hard to pinpoint what drives the market in the short term.” Triana echoed this point and also highlighted that companies likely to benefit from tax cuts were getting a recent valuation boost in the market. 

In fact, the biggest effect of the tax cut anticipation may be in the valuation of smaller public companies. Barry Glassman, president of Glassman Wealth Services, said the possibility of tax cuts was having a disproportionately positive effect on these businesses, with their valuation as a group increasing 11 percent in the last month alone, a valuation change significantly higher than that of larger companies.

Since the expectation of tax cuts is providing a boost to some companies’ market value, this raises the question of what happens if tax cuts don’t happen.  Not surprisingly, these financial experts who see the underlying economic factors as the primary driver of the market don’t see the failure of tax cuts to materialize as likely to cause a lasting downtown in valuations. The absence of tax cuts would be the sort of unexpected news that can cause markets to dip in the short term, but the underlying economy is what drives the long-term trend. And, those objective facts support ongoing growth in the value of equities.  

But, what happens if the proposed tax cuts occur?  There was agreement among those that I spoke with that the stock markets would get an upward valuation boost. How much was difficult to predict, since the current valuations have already built in the expectation of tax cuts. For them the biggest determinant for future growth would be the objective facts of the underlying economy.  

This is where many of these experts expressed concern. Tax cuts and their accompanying changes in the federal debt raised significant risk of higher inflation and higher interest rates. For example, Glassman pointed out that inflation could occur either because the tax cuts accelerate wage growth through new hiring, or through a rapid increase of federal deficits.

Inflation causes higher interest rates, which adversely affect private borrowers and federal expenditures on debt service. Inflation will also erode the value of the U.S. dollar, which will make imports and oil more expensive. Hard to imagine that this is a policy choice to make if you are a President trying to promote manufacturing jobs, exports and traditional energy industries. 

This is where many of these experts expressed concern. Tax cuts and their accompanying changes in the federal debt raised significant risk of higher inflation and higher interest rates. For example, Glassman pointed out that inflation could occur either because the tax cuts accelerate wage growth through new hiring, or through a rapid increase of federal deficits.

Inflation causes higher interest rates, which adversely affect private borrowers and federal expenditures on debt service. Inflation will also erode the value of the U.S. dollar, which will make imports and oil more expensive. Hard to imagine that this is a policy choice to make if you are a President trying to promote manufacturing jobs, exports and traditional energy industries. 

For years Republicans have been saying they believe in free markets. The financial markets are clearly saying that tax cuts are not necessary. Who is telling them that they are?  

 

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Politicians agree on the soundbite: everyone should have a job that pays a living wage. But they don’t agree on how to make that happen. I’d like to help them by sharing some things I have learned. 

Working with leading community and economic development entities over the last two years, I’ve had a close look at our region’s workforce. The data consistently show our region has been adding and filling lower-paying jobs that do not require technical or specialized expertise. At the same time, however, many high-paying jobs that require technical skills are going unfilled.  

For example, experts tell me there are as many as 40,000 unfilled jobs in the cyber security industry in the greater Washington region. Business owners in hospitality, construction and healthcare tell me the same thing: good jobs are going unfilled.  

Here’s what some people who are currently working this problem have told me.  

Ed Barrientos is chief executive of Brazen Technologies, a rapidly growing startup focused on matching talent with jobs. He sees a “major crisis in the ability of businesses to hire qualified and skilled candidates” and points out that this is a broad issue that cuts across industries. More and more frequently, employers are expecting new employees to have the required skills at the time of hiring. Pressures on margins and competition make them less willing to take on the expense of training on the job. They need to hire people who can hit the ground running. 

This is a theme that was echoed by Dario Marquez, president and CEO of Wize Solutions, a business that matches high tech job opportunities in Northern Virginia with workers in Southwest Virginia. His work shows him that “many employers look for candidates to have technical certifications.” Employers not only want workers who say they are skilled – they want some objective measure to ensure that workers are skilled. 

Meeting this challenge of training and certification can’t happen business by business. There must be a paradigm shift in in how we train workers and satisfy employers that workers have the required skills. Glenn Nye, a former U.S. congressman and now an advisor to regional tech companies, including Palantir and FiscalNote, believes that “the jobs of tomorrow will require a rethinking of education, from content at the secondary level to more holistic approaches at the post-secondary level.” 

Addressing the reality of skilled employment is complex. Janet Van Pelt, the CEO of the education firm CourseMaven and an expert on training, sees the issue as having three main components: access to education, credentialing students to demonstrate skills attainment, and public policy. The locations that are the most successful are those where government and the private sector work closely together.

These are just a few examples of what I hear every day. Businesses need skilled employees, but for the most part they do not have sufficient resources or the time to solve this problem on their own. When a business is growing rapidly it can be a tremendous job creation opportunity. Paradoxically, that is the time when they can least afford to train, but most need, skilled workers. 

Owners of rapidly growing businesses in our region haven’t told me that if their taxes are lower, they’d hire more people. What they have told me is that their biggest problem is finding skilled talent to fill they jobs they have ready and waiting. 

Politicians who want to grow our region’s economy need to focus on what the region’s businessmen are saying. After all, they should know best what they need.  

 

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Virginia will be electing its next governor in a few weeks. Many observers see it as a bellwether election. I think they are correct, particularly for what the election will tell us about entrepreneurs’ attitudes towards government and elected leaders. The job creators of our society have a strong message for our elected officials: tax cuts might be nice to have, but social stability and problem-solving are more important. Let me share some of what I have heard from them. 

Michael Avon, chief executive of ICX Media, a digital video start-up, told me that he has grown tired of partisanship. The current environment makes him “fiercely independent – more so than ever before.” He’s looking for elected officials to focus on “working with others to solve problems.”  

Eric Koefoot, president and CEO of Public Relay, a PR monitoring service, raised a similar concern. He thinks that he and many entrepreneurs are “political unicorns – socially liberal and fiscally conservative.” For him, political extremes won’t get the country to where it needs to be. He fears that the parties have become too focused on running towards their perceived bases – the Republicans becoming “socially backward and fiscally reckless” while the Democrats run the risk of becoming “anti-capitalist.” 

The concern that the GOP is abandoning its conservative roots was something I heard from a number of long-term Republicans. Rob Quartel, chairman and CEO of NTELX, a technology implementation firm, is a lifelong Republican who has run for federal office three times. He is very concerned that “both parties are more factionalized, tactical, more ideological” than ever. However, he has particularly strong words for his Republican brethren, because a focus on populism has made the Republican party “all negative all the time” and unwilling to work to solve problems on issues like immigration, free speech and human rights at all levels. These are all issues on which Quartel believes “real conservatives” can engage Democrats in constructive and respectful conversations. He worries that there are few real conservatives left in his party to work across the aisle. 

Worry about stability is another theme that came up frequently. Ajay Sravanapudi, a serial entrepreneur, finds that the current climate is making him more, not less, political. Although he does not identify with a party, he finds himself “pushed to the left even more.” He added that the “tolerance of the chaos of Trump by the right drives me nuts.” 

There’s one thing that I find truly striking as we head into Virginia’s gubernatorial election: the region’s entrepreneurial community is not choosing sides as much as it is choosing to stand for constructive engagement. For the first time in its history, the Northern Virginia Technology Council did not endorse the Republican candidate for governor, instead commending both Democratic Lt. Governor Northam and Republican Ed Gillespie for their willingness to promote innovation and workforce development. 

Another group of regional CEOs, led by James Quigley, the founder of GoCanvas, a mobile technology firm, delivered to both campaigns a letter asking the candidates for focus on workforce development and support for innovation to grow the economy. Almost uniformly, my entrepreneur friends are telling me that they will support politicians and leaders that are serious about solving problems, whatever their party affiliation. They are dismayed by the messages of division that have emerged as a political strategy. 

Both of the candidates say that it is entrepreneurs who will create the jobs our people need. Statistically, that is absolutely correct. Small and rapidly growing businesses founded by entrepreneurs have long been our national and regional economic growth engine. Since the candidates believe that entrepreneurs are so valuable, then my recommendation is that they listen to what they say are saying. 

Entrepreneurs want a government that works with them and politicians who work together. The politics of distraction and division being practiced by some just won’t get it done. 

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I was fortunate to be the moderator of a discussion with Lt. Governor Northam and Vice President Biden. We talked about how important it is to invest in our people, and take positive steps to create 21st century jobs. I was proud to be with them.

Vice President Biden pointed out that the Lt. Governor is a genuine and authentic man. This is consistent with what I have seen over the last 6 years. Public service is a phrase that has come to carry negative weight from some — but when I am with people like the Lt. Governor Northam and Vice President Biden I am reminded that there are many who try to do the right thing every day. Progress doesn’t happen by accident. It happens with intentionality.

 

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The moment when science fiction becomes fact can take even a technologist’s breath away. I confess to gasping for air when I talked about artificial intelligence last week with Max Tegmark, a professor at MIT and the author of “Life 3.0: Being Human in the Age of Artificial Intelligence.”

Tegmark pointed out we need to understand that artificial intelligence is not science fiction any more. Within the lifetime of most who are reading this column, software will develop the ability to complete complex tasks without human intercession. And it will do it faster and better. And that is a very disquieting thought.

So, should we stop developing AI? Tegmark doesn’t see that as the right question to ask. As he puts it, the question is “not whether you are for or against AI. That’s like asking our ancestors if they were for or against fire.” Tegmark believes that as tool makers we inevitably create software that achieves artificial intelligence. It is just in our nature. 

He then suggests that rather than deny the inevitable, we need to address what achieving  artificial intelligence will mean. How comfortable should we be with using it to direct military force or cyber security? Should we have AI allocate healthcare or other societal benefits? What is the role of ethics–our collective sense of right and wrong–in a world where software makes instantaneous decisions on its own? 

And then there is the thorny issue of consciousness itself, which Tegmark describes as the subjective sense of being. For him, it’s the difference between software that gets you from point to point and software that admires the scenery and feels the wind rushing over its sensors.

Does consciousness matter? Tegmark thinks that it does. Eventually, our software will develop the ability to process the world around it with a subjective sense of self. Software may never have feelings like we do, but it will think for itself based upon a sense of “thereness” that will be distinct from the task at hand. Software will be conscious, but in a way that will be alien to us because it will not be human.  Software may provide us with a “first contact” opportunity. 

When that happens, we will face profound challenges. What will be left for the human brain, when software can write better songs, make better artwork and allocate resources more efficiently? Will software become our overlords, our allies or our servants? Tegmark is asking us to consider that once artificial intelligence exists, these questions won’t be answered only by what we want.  

 

 

 

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Some people prescribe tax cuts whenever the question of how to accelerate economic growth comes up. But is that prescription right for this region?

I have been immersed for many years in fostering regional economic development sparked by rapidly growing technology businesses. Over the years, I have spoken with a broad range of educators, entrepreneurs, policymakers, economists and other stakeholders in economic development, and I have gathered a pretty comprehensive picture. Let me share some of what I have learned.

Maintaining our region’s ability to create high-paying jobs requires that we stay in the vanguard of new industries. The leading edge of what is truly new is where consumers and businesses are most willing to pay high prices and where demand is often the strongest. The combination of high prices and high demand creates businesses that can pay workers well and provide for career advancement. The challenge is that staying at the forefront of innovation requires a willingness to undertake basic research that is often expensive and equally often entails a substantial period where there is no profit opportunity.

Regarding the workforce, it is abundantly clear that already existing technologies are displacing unskilled workers and, to growing extent, skilled workers. Moreover, they do so at an increasing rate. Meanwhile, existing approaches to training and developing talent are not adapting to the new jobs that are being created, thereby creating supply shortages or leaving workers on the sidelines.

Infrastructure is chronically underfunded. We see it in Metro and the roads. Less visible but equally important is how many people lack broadband in our region — either because the infrastructure doesn’t exist or because it is far too expensive to sign up.

These are issues that can only be solved by collective action and substantial investment. We know how to do this. The difficulty is motivation. Solving these problems creates long-term social benefits, which are hard to measure. Financial returns are easy to measure — it’s how much additional money you get from investment. While we sometimes try to measure social benefits in financial terms, the reality is investing for financial profit and investing for long-term broader benefit are different.

The most successful regions in our country have figured out how to balance financial investment with social investment. Those that do it best are the ones that lead new industries. These orchestrated investments can be seen in communities that develop infrastructure (e.g., Research Triangle Park in North Carolina), commit to business attraction and support (e.g., efforts to attract Amazon’s HQ2), support local research institutions (e.g., connecting business entrepreneurs with university researchers) or support an environment that integrates larger and smaller businesses into a single community (e.g., Nashville’s rapidly growing innovation culture around health care). There is no single way, because no two regions are exactly the same.

Which brings us to tax cuts.

I will be the first to admit that tax cuts are a very seductive policy prescription. Who wouldn’t love to have more money to spend? But that is the point.

Historical data show that when tax cuts are targeted at higher income levels, the tax savings goes disproportionately into financial investments. There is no guarantee that the money will be invested in businesses (think of index funds, for example, where no direct investments in companies are made) or even a guarantee that the money is invested in the United States. The greater financialization of our economy may make some investors wealthier but it doesn’t provide for a pool of capital for social benefit.

I believe that right now, the best way to grow our region’s economy is increase social investment. To create a skilled workforce, to develop a 21st century infrastructure and to foster new industries, we need to make long term and considered investments. We need to be both wise financial and social investors.

At a time when objective data show that our overall tax burdens are at historical lows, is putting more money into financial assets what is best for our business and innovation community?

There are times where you can’t cut your way to success. This is one of them.

 

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Looking for opportunities to create economic growth, we should not overlook an invisible export. Media is one of the greater Washington region’s largest industries. News is the reason. 

I discussed this recently on “What’s Working in Washington” with J.J. Green, national security correspondent for WTOP-FM and host of the TargetUSA Podcast, Brian Fanzo, founder and chief executive of social strategy consulting firm iSocialFanz, and Judy Kurtz, In the Know columnist for The Hill.  

For all of them, Washington’s importance as a media center really begins with news. News is different from mere information. News is information that is important and worth knowing. What makes news worth knowing? In other words, what gives news its relevance?  

Green said for him the relevance of news begins with novelty, “News is not what people are talking about; it’s what they don’t know.” This makes Washington, D.C. a generator of lots of news, or as he puts it, “Hollywood when it comes to news.” The confluence of the White House, Congress, the Pentagon and other cabinet departments, courts, diplomats, businesses, professionals, and more ensures that there is always something important happening. 

But it is not just novelty. Information can be novel but trivial. Previously unknown information that can affect a person’s life, situation or prospects is news. Impact – consequentiality — is what separates the newsworthy from the trivial. Much of what happens in Washington, D.C. has the possibility of widespread impact.  

The region itself is a news-generating machine, and its productivity is enhanced by the visits of celebrities. The shared trait of all celebrities is that lots of people pay attention to them and listen to what they say. Kurtz sees how celebrities act when they come to town: they are often star-struck by the politicians and political leaders whom they meet. For many of them, “D.C. is their Hollywood,” a place where they attempt to convert their fame into social good by influencing politicians. And in doing so, they create news. 

Fanzo observed that D.C. also creates its own celebrities based on titles and position. As people serve in government as senators, congressman, presidents and judges, they become famous. This makes their words and actions newsworthy. Add to this the leaders of the countless trade groups, not-for-profits, and commercial businesses operating in our region.  

News originated in our region supports a vibrant and dynamic media industry, stretching from traditional media companies to new media startups. It’s an industry that is supported by technology, public relations and advertising businesses. Fanzo, a recent returnee to the D.C. region, has really seen the change and is “beyond impressed in the tech community, entrepreneurship and different brands” that have created exciting business opportunities 

News matters to our region’s economy. 

That is why our region must take so seriously preserving the veracity of news. While other regions of the nation may be concerned about “fake news” as a political issue, our region’s economic health depends upon the objective truth of our news. Without veracity and trust, news loses its value, both politically and economically. For our journalists, veracity and trust in the news is not a theoretical discussion. Nor should it be for those of us concerned with economic development. 

News can drive our region forward. As Green puts it, “the opportunities are just off the charts.” 

At a time where we are looking for industries that can create economic opportunity and jobs, news might be our most meaningful export of all. 

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