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17

Aug

The CFO: A Silver Bullet to Fix the U.S. Economy

THE PROBLEM

In business, executive management teams routinely study their competitors to determine which ones pose the biggest threats to their company.  They ask: Who is stealing our business right now and who has the potential to do so down the road?  Who has the leadership model to take us on?  Who is making decisions that will affect us in five years?  Who is thinking so far outside the box to make us uncomfortable if we do not innovate ourselves?

Leaders of countries do this as well.  And as many of those countries look at the United States today, they surely must not be as worried as they used to be. 

There are a number of reasons for this, but they can all basically be distilled down to the following: the United States is not being lead like a competitive company

Consider that:

We spend far more money than we take in.

We cannot align on our economic objectives as a nation.

We inject far too much social philosophy into otherwise rational, financial decisions.

We think year-to-year as opposed to planning for our long-term future.

The United States tends to succeed in spite of many limiting factors.  It is time to address those limiting factors so that we may unlock our true, future potential.

The 2012 federal deficit is projected to be $1.3 trillion (equal to $4,000 per citizen).  By the end of this year, our federal debt is projected to be $16.3 trillion ($54,000 per citizen).  Two startling thoughts put these figures into context: a) our debt is now more than 100% of the annual U.S. gross domestic product and b) the average American is makes $41,000 per year, so we would each have to work for more than a year to earn our share in paying off the national debt.

We must eliminate these fiscal gaps.  Achieving this will not be easy.  It will cause some pain and it will take unique approaches.

THE SOLUTION: A CFO

We must solve for three main issues in order to pull our country back from the brink:

-       We need a government that can make rational decisions – not emotional ones

-       We need federal mandates to keep our finances on-track – social issues must not affect financial ones

-       We must plan for the long term – not just the short term

We need an appointed (read: not elected) federal body – much like the Supreme Court – who has one sole purpose: plan and administer our national budget.  This body will come from the financial and economic worlds, a cross-section of analysts, economists and business people.  A bi-partisan group would nominate the first group of nine members.  From then on, vacancies would be filled through nominations by the sitting President and approved by the Congress.

If the President is the CEO of our country and the Congress is the Executive Management team, then this proposal is for the creation of a CFO – the Chief Financial Office.  The CFO will have great powers:

1.     Create the budget

2.     Set revenue policies including taxation

3.     Work in partnership with the President and the Congress to spend the revenues and invest for the future

With great power, however, will come great responsibility.  The CFO will have a number of requirements associated with its office, including mandates to:

1.     Balance the U.S. budget within 3 years of the creation of the office

2.     Adhere to a balanced budget every year thereafter

3.     Pay down a set percentage of the federal debt each year

4.     Plan for the phased reduction of current spending mandatories such as Social Security, government pensions and Medicare & Medicaid

5.     Create budget outlays on a 15-year rolling term – the immediate year is 100% set, the budget figure and breakdown for years 2-5 are set at 80% clarity and the figure and breakdown for years 6-15 are set at 70% clarity

Just as the federal government has a Solicitor General to represent its interest in arguing debates at the Supreme Court, the administration and the Congress will have representatives to debate policy to the CFO.  But, like the Supreme Court, the CFO will have the final voice since they will be taking the long-view in the best interest of our nation.

BENEFITS OF THE CFO


#1: Eliminate Pork

The greatest net-new upward pressure on our federal budget each year are the multitude of programs added to our spending in order to satisfy local and regional constituencies: a bridge, a new highway, a senior center, tax breaks and the like.  Representatives have to fight for these dollars – and they should.  But we must not continue to allow Congress to do so in the interest of their re-election prospects nor allow these expenses to increase the overall size of our budget.  Let the fighting begin after the overall budget level has been set by the CFO.  Doing things this way will mean that tradeoffs will be required as opposed to the spiraling effect that increases our federal budget.


#2: Enable Hard Decisions

Elected officials do not stand up to advocate for reductions in entitlement programs.  Doing so is considered the third rail of American politics.  We need a system that takes these decisions out of the hands of those we elect and puts them into the hands of those who will be free to make decisions for the betterment of the whole country.

We need to enable hard decisions, which include cutting popular programs.  Even though the members of the CFO would have their own political biases (just as we all do), financial planning that looks fifteen years out will reduce desire to act on them.  We will not create the perfect system, just a far better one where making financial decisions are not made to influence the outcome of the next election.

#3: Keep Capitalism Honest

Capitalism is one of the great philosophies of our world.  It works very well.  But it only works well to a point, and then it presents major challenges.  We know the benefits – such as free markets and expansion of wealth – so I will not spend time discussing them here.  Instead, allow me to focus on the issue that challenges our economy and, therefore, must be addressed: Capitalism incentivizes short-term planning.

On Wall Street, capitalism manifests itself in this manner: public companies are managed on a quarterly basis.  Each quarter, corporations must report their earnings to Wall Street.  If a company does not meet or exceed estimates for that quarter, the stock price gets beaten up.  Since the goal of a CEO is to create shareholder wealth, CEOs are incentivized to manage for the short term.  This comes, of course, at the detriment of long-term planning and prosperity, as CEOs are de-incentivized to make investments that could increase revenues or profits a few years out.

Our government operates similarly.  Decisions that positively affect the outcome of a key issue in the short term are fast-tracked.  Instead of maximizing short-term shareholder value as on Wall Street, our government makes decisions to help the party or the individual get re-elected to office.  With Congressional elections happening every two years and races starting in earnest a year in advance of those elections, our government makes financial decisions year to year.

Capitalism is a wonderful institution, but it is time that we increase our time horizon on determining if the decisions made within it are judged a success.

#4: Make Long-Term Decisions

If we make the goal of the CFO to increase performance of the economy for the long-term, we will wind up investing in forward-looking aspects of our economy.  With an eye on hitting performance targets 15 years in the future, decisions will be made on our financial outlays accordingly.

With the CFO, we will get budgets that consider long-term prosperity, not short wins.  Today, the President submits a budget to Congress that has no chance of becoming instituted because the Congress tears it apart in the interest of adding and subtracting items that are in line with their political philosophies.  The result is not a financial approach that is competitive in a global economy.

We need to invest in segments of our economy that allow us to own our future.

SUMMARY

Our current system ignores the economic needs of our country and its people.  Debt ceilings are increasingly raised, spending is out of control, solutions are nowhere to be found and our citizens have lost all confidence that our government can agree on enough to keep our country strong.

The concept of a Chief Financial Office is a relevant solution to take us from where we are today to where we need to be to restore our competitive advantage in the global economy.  It takes a long view, turns decision making from emotional to rational and replaces our current system (and many government bureaucrats) with one that mandates change for the better.  The CFO is the silver bullet that would fix our economy.