In 2009, Google announced its first large-scale layoffs and the closure of several offices. These painful reductions enabled Google to expand revenue and profits during a challenging economic environment over the last two years. Google’s fiscal discipline helped its stock price more than double from its November 2008 low of $260/share to a high of $630/share in November 2010.
As career technology startup investors, we have some advice to President Obama: be like Google. Cut your “burn rate” and enable America to return to its natural state of growth, innovation and prosperity.
Setting aside the many loopholes in terms of continued hiring and promotions, President Obama has taken a positive first step in freezing salary levels for most federal workers for two years.
But he needs to do more. Google needed to reduce its employee rolls in a recession. The federal government, choking on deficits, needs to reduce headcount and to slash salaries.
President Obama should do this for two reasons. First, it would save money and materially reduce our annual deficit. Second, it would help to regain the confidence of America’s bond-holders, military allies, trading partners, and perhaps most importantly for Obama… voters.
America’s 2010 tax receipts are estimated to be $2.2 trillion. With Obama’s annual deficits running around $1.5 trillion, our government is spending roughly $3.7 trillion a year. A 40% cut in spending would be required to turn America profitable, all else being equal. Tax rate hikes are not a viable option since they are a drag on the economy and tend to reduce job creation and tax receipts.
Why do tax hikes reduce tax revenue? Tax revenue as a percentage of GDP has closely hugged 18% for nearly 60 years in a row, including under President George W. Bush. Whether top marginal tax rates were 70% or 28%, the “take” by the feds has been the same: 18%. Raising rates only leaves the feds 18% of a smaller pie with more unemployed people to assist.
Can Obama reverse this 60-year trend and collect a higher percentage of GDP? No. In fact, Obama is the first president since 1951 to collect less than 16% of GDP in federal tax receipts, with 2009 and 2010 estimated to be just below 15%. This is a stunning development and is not consistent with past recessions when the federal tax “take” remained on its 18% trend line.
Since we cannot and should not raise taxes, we need to cut spending.
How deep would a private sector tech startup cut its personnel costs if it missed projections and posted annual losses on the scale of the USA? What would a startup’s board of directors do if the startup increased its annual losses by a factor of six (to $1.5 trillion!) and missed its unemployment rate target by an economy-crippling 2%? It would fire the CEO, cut salaries by 20% and lay off 50%-80% of the staff. It is very common, and sadly sometimes necessary, for an unprofitable venture capital-financed startup to cut 50% of its staff in order to survive. We have seen this type of deep cut save companies in our own careers as venture capital investors. And if a new management team and a lower spending rate is not able to restore financial viability, a startup’s board would likely sell or shut down the company. Let’s hope our Chinese bond holders are more tolerant than tech startup board members.
And how do “mature” tech startups deal with recessions? In the current downturn, in order to maintain investor and employee confidence, profitable and growing Google laid off a few percent of its employees. Profitable but stagnant Yahoo eliminated 10%. Struggling MySpace let go of 30%.
Job cuts are terrible. But it is better for society and individuals to save a portion of jobs than lose 100% of them. And if the company survives and grows, those jobs will all come back. Google has continued to grow since its cutbacks and has more than made up for the jobs it cut in 2009.
Based on our experience as board members of startup companies, we recommend a federal work force cut of 20%, a federal salary cut of 20%, and equalizing public sector health and retirement benefits with the private sector. This alone would not eliminate the deficit. But it would be a great start.
By the way, Google, Yahoo and MySpace managed to maintain their core service at a high level during and after their cuts. The websites still work. So too could the federal government fulfill its core functions with 10%, 20% or even 50% less staff. George Washington made it on Mount Rushmore with only four people in his cabinet. We believe a Democrat or Republican president could still run our military, national parks and more without the help of a few hundred thousand people at the Department of Energy, the Department of Agriculture, etc.
We have friends who work in these agencies. They are good people. But they are not more deserving of a shield from pay cuts and layoffs than the employees of Google, Yahoo and America’s other private sector employers. Public sector employees are supposed to work for private citizens, not the other way around. America is the greatest country in the world because we embrace market-based discipline, rather than reject it. Let’s act on that and reform and restructure our bloated federal government. As President Clinton has declared, “The era of big government is over.”
If you consider our proposal extreme, consider this from the Wall Street Journal: “The co-chairmen of Mr. Obama’s deficit-cutting commission also took aim at federal employees, calling for a three-year freeze on compensation for civilian workers and a 10% reduction in the federal work force by 2020, which would eliminate 200,000 jobs. The pay freeze alone would save $42.3 billion over five years, the co-chairmen projected.” Please note that Obama’s bipartisan commission is majority-controlled by Democrats. A 10% cut in the federal work force is a moderate Democrat position. We can, should and must cut more to keep America prosperous for future generations.
And if you wonder how government employees could survive on a 20% pay cut, read this, also from the Journal: “The Heritage Foundation, a conservative think tank, has said compensation for federal employees is 30% to 40% higher than for comparable jobs in the private sector.” For full disclosure, the article also states that “federal employee unions call that assertion a ‘myth.’”
And finally, if you are in the mood for a gut-busting laugh, consider the following left-wing rejection of President Obama’s modest two-year federal pay freeze proposal, also in the Journal:
“It’s an economic recession, and this is the time you want to be raising wages, not cutting wages,” said John Irons, research and policy director at the Economic Policy Institute, a labor-backed think tank.”
Raising wages is indeed a noble goal. Guess which employer discussed in this article is currently raising wages for its employees by 10%, paid for by previous layoffs that set the stage for future hiring, growth and prosperity? If you guessed Google, you are correct.
Mr. President, we believe you have a personal relationship with the CEO and the founders of Google. We recommend you call them. Get some good advice on America’s business model. How can we get America profitable again?
And how can we “scale up” to meet the challenge of a rising China? That will be the topic of our next Daily Caller op-ed…
Charles Curran and Patrick Ennis have spent over 35 combined years as technology investors and innovators. We live in Washington, DC and Washington State, respectively.