Henes: Three Steps to Fixing the US Economy
When a corporation is in the zone of insolvency – i.e., not yet insolvent but on its way – the board of directors should make decisions intended to maximize the corporate value of the firm.
In practice, this is not easy to do because as a corporation is in financial distress it is difficult – if not impossible – to make the investments necessary to maximize value.
Consequently, there are three steps a corporation generally takes to put itself in the best position to maximize value over the long term.
First, the board of directors makes decisions intended to preserve value. In other words, it attempts to stabilize the business and stop the bleeding. Second, the board of directors, with management and advisors, develops a long term business plan, which lays the foundation for the future business. Third, the corporation follows the business plan and, in that regard, begins maximizing value. While corporations and governments clearly are different, this tried and true corporate technique should be followed by the federal government to deal with today’s economic malaise.
The federal government would like investors – whether they are private investors, start ups or large corporations – to focus on maximizing value and returns.
This will help the economy begin to rise again. But right now, we are in preservation mode. Corporations are sitting on huge amounts of cash unwilling to spend or invest it. Many investors are buying treasuries or keeping their money in cash. And, according to today’s Wall Street Journal, investors buying equities are focused on large, dividend paying stocks. This all makes sense. The United States is in economic distress – it is in the zone of insolvency (if not insolvent, which we will know better with 20-20 hindsight) and, as a result, the people and firms that invest and spend to grow the economy are more focused on preserving value, not maximizing value. So, what needs to happen?
Like in the corporate setting, the federal government needs a plan – both a short term plan to stop the bleeding and a long term plan to restructure America.
This plan needs to be credible, transparent and certain. In the short term, it needs to assure that the federal government does no harm. Specifically, the federal government needs to keep us away from the fiscal cliff. If we fall off the fiscal cliff, we will have austerity by inaction – tax increases coupled with spending cuts – which will result in economic decline. Skeptical? Look across the pond to Europe. The austerity experiment has done nothing but slow the economy and raise unemployment, as well as social and political strife. To assure that we do not fall off the fiscal cliff, the federal government – both democrats and republicans – needs to come together and focus on compromise rather than ideology. Most business leaders would vote to neither raise taxes nor decrease spending in the short term.
Why? Because there is no plan in place. It is simply political maneuvering and short term thinking.
Everyone knows that we need to restructure our tax code and reduce our spending, but how will we do it? This should be the federal government’s focus. It should be preparing a long term plan for America. It has a model to start with – Simpson Bowles – and reasonable, rationale people could come up with a plan that works. If the federal government does no harm and a plan gets put in place, investors and businesses will begin to increase their confidence and the investments and private spending will come. And once it does, the United States can go back to focusing on maximizing value.
Jon Henes is a partner in the restructuring group at Kirkland & Ellis LLP where he has led some of the most complex restructurings in a variety of industries, including media, chemicals, energy, manufacturing, real estate, retail and telecommunications. Jon has also frequently appeared on CNBC's "Worldwide Exchange" as a guest expert on various financial and economic topics and is a member of the Economic Club of New York.