Econony

Should We Try to Save the Damaged Brands?

As the American government struggles with what to do with its new ownership stake in storied corporate brands like AIG, Chrysler, Citigroup and General Motors, one of the fundamental questions that must be asked now is, can these brands - after months of stories about their insolvency - be saved?

I'm not so sure. 

Consider this passage from a NYTimes piece by Keith Bradsher about AIG's struggle with their damaged global brand:

Less than two months after changing its name, the biggest and best-known unit of American International Group is preparing to change its name again, in the latest sign of damage to one of the world’s most famous brands.

A.I.G. changed the name of the worldwide holding company for its property and casualty unit to American International Underwriters in early March.

The renamed A.I.U. quickly began issuing new business cards to employees and printing promotional materials, particularly in Asia. But A.I.G. has now decided that the A.I.U. name does not represent enough of a change, and is in the final stages of choosing a new one, said Leslie J. Mouat, A.I.U.’s regional president for Southeast Asia.

“The advice we’ve received is A.I.U. may be a bit close to A.I.G. — we don’t want to appear as the same leopard with different spots,” Mr. Mouat said in an interview, adding that he was told only Saturday of the decision to change the name again, which has not been publicly announced.

The question facing the Obama Administration now has to be not whether these companies can be saved, but what is the best way for valuable parts of the company to succeed and provide return to their investors (in this case the government).   One way is to prop up the companies, as we are doing now.  But there is a strong argument that these companies are so damaged now that their brand itself is permanently insolvent, and that the best course would be to break the companies up and sell their parts off to other stronger less damaged brands. 

AIG may be changing its name, but I think it will have to do much more than that to convince future customers that this not the same enterprise which made some of the greatest corporate blunders in the history of commerce.   All things being equal, would you buy a car from General Motors now, or or insurance from that company formally known as AIG, or open a new account with Citigroup?

The answer to this question needs to be an important part of what comes next in this difficult debate.

The Recovery and Investment Act - Much To Cheer About

Despite the bumps in the road over the last few weeks, there can be no doubt that President Obama and the new Congress have acted decisively, quickly and with great force in passing the Recovery and Reinvestment Act so quickly.  After years of politics and dithering, the nation should be relieved they have leaders in place willing to take on the hard challenges of our day. 

Speaking for the NDN team we are very pleased with where the new bill has ended up.  Many of its core ideas - investments in health IT, clean and traditional infrastructure including greening federal buildings, 21st century schools and uiversal broadband access, support for unemployment insurance and backstopping the states, weatherization - are ideas NDN championed publically and privately before the President-elect outlined his original stimulus plan in early December.   Consider this passage from an essay, A Stimulus for the Long Run, Rob Shapiro and I released in Mid-November originally on the Huffington Post

When Congress goes back to work next week, its first job should be another stimulus package for the sinking economy. President-elect Obama also has said he wants another stimulus of his own design after he is sworn in. We know that more stimulus is necessary, because the ongoing financial and housing market crises will very likely produce an unusually long and deep recession. We also need additional stimulus as insurance against the possibility of another economic shock that would worsen the downturn, such as a run on the dollar that drives up interest rates, or worsening housing foreclosures that trigger more failures in financial institutions and further drive down consumer and business confidence.

The path of least resistance to deliver that stimulus is another round of tax rebates for American families, which in theory families would spend to jumpstart demand and, ultimately, the business investments and jobs to meet that demand. However, the catch is that approach is very unlikely to work this time. Most of the rebates from the spring 2008 stimulus were saved rather than spent; and given the recent, sharp decline in confidence, even a greater share of another round would be saved and so provide little stimulus. Moreover, President Obama and Congress can put those billions of dollars to uses that will stimulate long-term growth and income gains much more effectively.

Instead of tax rebates, congressional leaders and President-to-be Obama should look to targeted tax changes and targeted spending increases, with the lion's share going in a new direction: investments in the basic elements of growth for a 21st century economy. The stimulus should and will include traditional measures such as aid to the states facing serious revenue shortfalls and an extension of unemployment insurance. But for its major thrust, President-elect Obama should use the stimulus to drive policy reforms that will affect the shape and strength of the economy for the next decade, rather than simply affecting the timing of the next recovery. The stimulus should be first steps toward delivering on the change that President-elect Obama has pledged to bring to America.

This change should be directed toward creating a 21st century, low-carbon, innovation-driven economy, as the development, spread and efficient use of economic innovations will continue to be the most important factors driving all our future progress in growth, productivity, and incomes. For example, productivity gains are increasingly tied to an employee's capacity to operate effectively in workplaces dense with information and telecommunications technologies. Within a decade, workers who cannot perform in such work environments will be marginalized economically. Therefore, the stimulus should help businesses and workers prepare for the ideas-based economy, through grants to community colleges to keep their computer labs open and staffed in the evenings and on weekends for any adult to walk in and receive free computer training, a plan Obama endorsed as Senator. The stimulus also could include an innovative program to provide inexpensive laptops to every sixth-grader in America and spread broadband installation to schools, local libraries, and human services offices that currently lack it.

There is already a broad consensus on the need to include infrastructure investment in the stimulus, but instead of addressing only roads and bridges, America can also take this opportunity to invest in a new generation of clean infrastructure. The federal government can lead the way, through greening its buildings and vehicle fleets and putting 1,000 megawatts of solar power on its roofs. It also can provide funding to help modernize the electrical grid and build a new generation of light rail systems for urban areas, as well as greater support for research and deployment in renewable energy and energy efficiency technologies, and tax credits and other incentives for greening America's homes and private buildings.

Aside from energy, the other rapidly rising business cost squeezing wages and jobs is health care. To help hold down these costs for the long haul, the stimulus can provide support for hospitals, clinics and physicians to purchase and install the hardware and software for standardized electronic medical records systems. This will serve as a first down payment for 21st century health care reform, and will ultimately reduce costs and promote best-practices at the nation's hospitals.

These are all investments we know we have to make if we intend to make the U.S. economy more efficient, innovative and sustainable. They also are all investments that will ultimate pay for themselves several times over. Congress and President-elect Obama can use this opportunity not only to create more jobs, but to do so in ways that will help drive the development of a real, 21st century workforce and genuine 21st century economic infrastructure. And taking this course by passing a stimulus for change could be an early and important opportunity for him to practice both his new politics and a new form of economic leadership.

Or this passage from Michael Moynihan's excellent October essay, Accelerating the Development of a 21st Century Economy: Investing in Clean Infrastructure: 

Below are six proposals NDN offers to accelerate the building of clean infrastructure now. Each of these will help get money onto the street quickly to stimulate demand, help American families solve problems related to high energy costs and build the clean infrastructure America needs to compete effectively in the 21st century. Congress should pass legislation to:

 Fund the National Infrastructure Bank to leverage federal resources to fund
worthy, approved clean infrastructure projects (which would not only increase
funds available to infrastructure, but also represent a vast improvement over the
earmark system).

 Modernize the electrical grid through use of smart computer technology and
more transmission capacity, both to manage demand and move America's
tremendous wealth of wind and solar power to where it is needed.

 Provide tax credits for Americans to winterize their homes as the cold weather
approaches.

 Provide tax credits for the purchase of Energy Star appliances to reduce
demand for electricity.

 Provide aid to states and cities to expand mass transportation service and
perform maintenance on overburdened systems.

 Provide a tax credit to people who buy a new, fuel efficient car and take an old gas guzzling jalopy off the road, which has the added bonus of aiding the
weakened automobile industry.

There are other ways for Congress to promote clean infrastructure going forward -- through funding rail, promoting green national building standards and updating our electricity regulation regime to promote distributed generation of renewable power, among other approaches. But these six proposals can help us move toward clean infrastructure now as we get the economy moving again.  

So in other words NDN is very invested in this new legislation, and will be working hard with our Congressional leaders and all of you to ensure that as the plan moves from bill to implementation it is done in a way consistent with the opportunties presented to us and the nation.  More on this historic piece of legislation in the days ahead. 

And again Congratulations to your new President and Congress for stepping up, standing tall and doing the right thing for a nation in need.

Update - Jake Berliner did a comprehensive summary of our recent economic essays on Friday.  You can find it here

$1 Trillion Deficit Projected Next Year

At this point there is almost nothing that Bush touched that he didn't break:

Congressional leaders and both presidential candidates are proposing billions of dollars in tax breaks and other measures to stoke economic growth, a surge in spending that could send the federal deficit soaring toward $1 trillion this year, creating the deepest well of red ink since the end of World War II.

The government already has embarked on an unprecedented spending spree to halt the implosion of the U.S. financial system and is borrowing money at levels that some economists fear could undermine the nation's economic security for years to come. Congress could consider additional spending as soon as next month, potentially digging the nation's hole even deeper.

"We're going to make Ronald Reagan look like a piker in terms of deficit creation, I think," said Rudolph Penner, a senior fellow at the Urban Institute who served as director of the Congressional Budget Office during the Reagan administration.

The numbers are adding up fast. Since President Bush signed an economic stimulus package in February, authorizing billions of dollars in rebates for American taxpayers, the government has pledged as much as $1.5 trillion to prop up the teetering economy. It has approved new mortgages for struggling homeowners, salvage operations for faltering financial institutions and a historic $700 billion bailout plan to pump money into banks paralyzed by the financial crisis.

The Treasury Department so far has borrowed nearly $500 billion from pension plans, foreign governments and other investors to replenish the coffers of the Federal Reserve. Since the end of August, the national debt has jumped from $9.6 trillion to $10.3 trillion, with borrowing for the bank bailout yet to come.

Meanwhile, the budget deficit -- the annual difference between government spending and tax collections -- has risen rapidly. It jumped from $162 billion last year to $455 billion in the fiscal year that ended in September, largely because of the cost of the stimulus package, as well as slowing tax revenues and rising expenses in Iraq and Afghanistan.

The budget picture looking forward is even bleaker. While the deficit is projected to be about $550 billion for the fiscal year that began Oct. 1, budget analysts have yet to figure in the effects of a recession, which could easily tack on another $100 billion. They also have not included the first $250 billion being spent on the bailout plan, which the White House budget office said this week must be added, even though much if not all of the money is eventually expected to be returned to the Treasury.

And with options for a second round of stimulus spending starting at $52 billion -- the size of the package proposed earlier this week by Republican presidential candidate John McCain -- it's not hard to imagine the deficit rising to $1 trillion. That would approach 7 percent of the economy, a yawning budget hole not seen since 1946.

Some economists say that prospect should dampen talk of further spending. Others say it's better to spend the money now in an effort to protect jobs and smooth over the harshest effects of a recession than to lose the money later through sharply lower tax collections and higher unemployment payments. Economists advising House Democrats are urging a spending package of as much as $300 billion, arguing that the economy could shrink by about that much over the next year.

Read the rest of the story from the Washington Post here.

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