Fred Wilson: America Needs A Turnaround Plan

Obama’s mantra of change, since adopted also by McCain, is not enough for me. We need more than change. We need a full-blown turnaround plan and a leader capable of executing it.  I’ve moved beyond the splurge because like it or not, we are going to get some legislation out of Washington that allows the government to purchase and/or backstop the “crap assets” that are clogging up the arteries of the financial system. My head is around what’s next.

Yesterday, I was visited by a reporter named Nathan Lipson from The Marker, an online financial publication owned by Haaretz, the WSJ of Israel. As an aside, I was somewhat involved in the creation of The Marker about ten years ago, but that’s another story. Yesterday we sat in our conference room at Union Square Ventures and Nathan turned his phone to record and started asking me some hard questions. Questions that I had not prepared to be asked and that frankly I am not qualified to answer. But that didn’t stop him and it didn’t stop me either. These are unusual times and I’ve got opinions to share.

He asked me where America was going to get the $700bn needed for the splurge. I reminded him that the legislation (at least last I looked) only authorized $350bn upfront and only $250bn of that would be funded initially. I pointed out to Nathan that if we up and left Irag this month and walked away from all of our financial commitments to Iraq and it’s security, we’d save $250bn over the next two years. We could use that money buying the crap assets, holding them through the downturn, and then flip them when things get better, hopefully for a profit. That’s a hell of a lot better than spending $250bn providing a police force for Iraq while they assemble an oil-funded surplus for their own account, not ours.

Nathan also wanted to know if the US needed loans from foreign governments to finance the splurge and our ongoing budget deficits. And he wondered if America’s government was still AAA credit. I’ve been wondering that myself. But it was eye opening to be asked that from a journalist from one of America’s strongest allies. If the Israeli’s are wondering if our country’s credit is any good, what are the Chinese and the Sultans thinking?

I pointed out to Nathan that America still has the largest economy in the world, that more money flows through our homes, banks, and businesses than anywhere else. And that our government, unlike a business, can raise revenues instantly by increasing taxes. Nathan asked if raising taxes at a time like this would be possible. I answered that it’s like Mike Bloomberg raising real estate taxes 7% to close the budget gap in NYC next year. You have to bite the bullet and do it. You have to tax the people who have the most vested in your government and the most ability to pay. That’s why we have no choice but to repeal the Bush tax cuts and take our rates back to where they were under Clinton (when the economy was doing just fine by the way). That move alone will plug a sizeable chunk of our federal budget deficit.

Leaving Iraq and getting rid of the Bush tax cuts are not the only things we need to do to fix the financial mess we are in but they are the obvious first two things we need to do. When you are doing a turnaround, you need some early wins and those are low hanging fruit that must be grabbed quickly.

My friend Bryce posted this thought to VC Tips yesterday:

Tough times call for tough calls

That’s what turnarounds are all about. You must make the tough calls.

Last night Gwen Ifill asked both Joe Biden and Sarah Palin the same question that Jim Lehrer asked Obama and McCain, “how will the splurge affect your spending plans?” (Gwen didn’t use the word splurge unfortunately)

That is a good question. Sarah Palin dodged the question not once, but twice, and the only financial plan she could muster was tax and spending cuts. Which is the only financial plan John McCain can muster as well. I can assure you that the governments, institutions, and individuals who have loaned America trillions of dollars are not going to buy a financial plan that starts with bringing in less revenue and promises to spend less. That’s the plan that every Republican president has laid out since Reagan. And with the exception of George Bush senior’s decision to increase taxes late in his presidency, the whole lot of them have simply led America down a path of budget deficits, increasing indebtedness to foreign governments and institutions, and to this day of reckoning that we are now facing.

Joe Biden’s response was better but not good enough. I understand that Obama, McCain, Biden, and Palin are all trying to win an election and a tough, honest, turnaround plan probably is political suicide. But at least Biden was honest enough to admit that a lot of the things he and Obama want to do will have to wait or be scrapped entirely.

When you are doing a turnaround, the number one thing you need to do is get everyone’s confidence back. You need to get the employees’ confidence back, you need to get your customers’ confidence back, and you need to get your shareholders’ and your lenders’ confidence back. You have to be honest about the mess you are in and be credible about what it’s going to take to get out of it.

The mess we are in right now in America is that we are spending too much and not taxing enough. We are an unprofitable business with a balance sheet that is starting to worry our creditors and investors. If you could short America, the sharks in the market would be all over that trade. We are not much better than Lehman, Bear, Merrill, Wachovia, and Wamu.

We have global ambitions that we cannot afford but we still pretend we can. We have tax revenues that do not cover our spending. And we don’t have the will to cut our spending. And in many cases, we cannot afford to cut our spending. We should not cut our spending on infrastructure, we should increase it. We should not cut our spending on finding cleaner and smarter forms of energy, we should increase it. We should not cut our spending on education, we should increase it. We should not live with the terrible health care system we currently have, we should fix it. And we continue to spend money on things like tax breaks for oil companies and subsidies for farmers that mystify me and most Americans.  And we spend a lot of money fighting vices like drugs, prostitution, and gambling when we should simply legalize them, tax them, and regulate them and turn them into a profit center.

There are those who say you can’t cut spending and raise taxes in a recession - that doing that will lead to a depression like we had in the 1930s. I don’t think so. I think the global economy is in an expansionary period driven by expanding wealth in the developing world and the power of technology to drive commerce and communication. And our problem is we are stuck in the last century, fighting the last war when it’s long over. We need to get our house in order, play in this global economy with a stable and sustainable business model. And we don’t have that now. And we must get it in place soon.

I don’t know squat about government and I’d be a terrible politician. I am not suggesting I could build the turnaround plan or execute it. But I am saying that is what we need. We need way more than change. We need our leaders to make some very hard and unpopular decisions that will get us to a place where we are once again in control of our own destiny. Because right now we are not in control of our destiny. And that’s frightening to me and most Americans.

SAI contributor Fred Wilson is a partner at Union Square Ventures. He writes the influential A VC, where this post was originally published.