In debates about the United States debt and debt ceiling, politicians and pundits are leaving one key variable out of the discussion: Growth. Harry Wilson, an expert at restructuring failing companies, thinks that America should focus more attention on the positive side of the ledger.
“Ultimately what has allowed us in the past to get over our debt problems, whether immediately after World War II or in the early 90s, was having robust economic growth,” says Wilson. “If you look through the math of having an extra point of GDP growth over ten or fifteen years, it is really a massive impact on our fiscal health.”
Wilson was a key member of the Presidential Task Force on the Auto Industry in 2009. He also ran for Comptroller of New York in 2010, losing a close race to the incumbent, Thomas DiNapoli, despite earning endorsements from all three major New York City newspapers. Prior to that, Wilson worked at Blackstone Group and Goldman Sachs and was a partner at Silver Point Capital. Next week, he sits down with Steve Forbes as part of the Intelligent Investing video series. Get briefed on his ideas below and be sure to check back on Monday for his full interview with Steve Forbes.
Focus on Growth
Wilson doesn’t think the debate over taxes and spending is without value, of course. “I’m grateful that we’re having the debate now, because the situation, as dire as it seems, is actually worse than people think, when you factor in the present value of the long term liabilities of Medicare, Social Security and Medicaid,” he told me. It’s just that he’s in a hurry to get that part settled so the country can refocus on economic growth. “The sooner we deal with it, the better. Obviously it would have been better if we had dealt with it years ago.”
“If you look at this past decade we have had, really, anemic growth. If you strip out the effects of leverage, we’ve had anemic growth for most of the last twenty years,” says Wilson. “The question is how do we – as a mature economy – increase our growth rate?”
In addition to lowering taxes, broadening the tax base and lessening regulation, Wilson see a more manufacturing-friendly economy as a core of long term growth in the United States.
“Without manufacturing jobs and a manufacturing base, it’s hard to generate real incremental income as a nation, because it’s essentially a zero sum game,” says Wislon. “And there are a lot of R&D spinoff opportunities that come from a manufacturing base that don’t happen if you don’t have one.”
“A good example is when Amazon wanted to build the Kindle. They wanted to build the Kindle in the United States,” says Wilson. “Here is a company that has been very successful in the United States that wanted to build a highly successful product in the United States. But there weren’t any LCD screen manufacturers in the United States, so they couldn’t. They had to outsource it.”
“I think there are things that can be done that are free market oriented but allow for the basic building blocks of a more robust economy to lead to a better growth profile.”
Getting Manufacturing Back
Easier said than done, perhaps. But when it comes to bolstering domestic manufacturing, Wilson has ideas that go beyond the typical lowering of the corporate tax rate – although he thinks that is a key step to take as well. He also is in favor of tax credits for manufacturing as well as supporting worker training programs in order to incent companies to push a manufacturing-oriented agenda.
Another key step to building a more manufacturing-friendly economy is aligning an educated workforce with open jobs in the United States.
“You would think it would actually be pretty easy to find labor,” says Wilson, citing an underemployment rate in the high teens. “But when you talk to CEOs, what you find is that they don’t have the skills that they need; there’s a mismatch between what we’re producing out of colleges and high schools and what the economy needs.”
To solve that problem, Wilson advocates a two-pronged approach. “Creating some kind of incentive program that allows for better matching of the labor needs of certain companies and educational institutions could help,” he says. “Another example of something that can further drive growth is smoothing immigration for people who advanced degrees – physics PhDs who have to leave the country after their visa runs out. They could be launching the next Google or the next high growth company, and they leave the country and take that intellectual capital elsewhere.”
The Presidential Task Force on the Auto Industry
Wilson, who has an extensive background in restructuring distressed companies, came to national prominence thanks to his role on the Auto Industry Crisis Task Force. He volunteered for the position in 2009 and ended up taking an influential role on the Task Force.
“It was clear that the Bush administration had already waded into both financials and autos at the end of ’08, and it was clear that the Obama administration was going to do more, through TARP,” says Wilson.
“I was really concerned with two things. One, I had this really deep skill set in restructuring companies that I felt could be put to good use in fixing some parts of the economy. Secondly, I was really concerned that the administration would – like most governments do – hire a bunch of bureaucrats and have them work through the problems, when they wouldn’t really understand the restructuring that needed to be done for the companies that were going to receive government funds through TARP. “
“That’s why I volunteered.”
Once on the Task Force, he took an integral role in the restructuring of General Motors.
“We took nearly $10 billion of costs out of the company and allowed it to restructure in a way that made it competitive. It now has the lowest cost structure in the auto industry,” says Wilson. “We’re selling about 12 to 13 million cars a year now in this country; the peak was over 17 million. It used to be that General Motors would only break even at about 16.5 million. Now it breaks even at about 10 million, to put that in perspective.”
Task Force Results
Wilson, on the whole, is pleased with the results of the Task Force.
“GM was a hugely successful financial and operating restructuring, in my opinion. The market hasn’t fully appreciated that yet – although I think it will over time. If you look, most of the Wall Street research reports have huge buy recommendations on GM’s stock,” he says
In particular, the Task Force was successful in preventing further spread throughout a highly integrated automotive supply chain in the United States.
“GM and Chrysler and Ford basically buy their parts all from the same companies. had GM and Chrysler failed, their suppliers would have been wiped out because they would have lost most of their customers. And if their suppliers had been wiped out, then Ford wouldn’t have been able to buy parts and Ford would have been wiped out,” says Wilson, detailing the potential for a domino effect.
“If you look at any of the comments [Ford CEO] Alan Mulally or other Ford senior management members have made, they’ve all been very supportive of what we did. Why would a company that just had its two biggest competitors bailed out by the government be supportive of that? Any other time, the company would be protesting and doing anything in their power to stop it,” says Wilson. The potential for widespread failure was a specter throughout the industry.
Why The Bailout Was Necessary
Wilson also addressed critics who thought the bailout was unwise and that the companies should have gone into bankruptcy.
“We took them through bankruptcy. The government provided DIP financing because there was no private sector actor willing to do it. We talked to all the big banks and a number of big private equity firms. None of them, at that point in time, were willing to put up more than $1 billion dollars in capital to provide for a DIP. And GM needed $49.5 billion.”
“If you talk to Jamie Dimon or Lloyd Blankfein or any of the bank heads, they all would readily admit that none of them were ready to stand up at that point in time, because they were all fearing for their lives, their own survival. Even in the depression that didn’t happen – that kind of massive retraction of credit. I think people who weren’t deep in the markets at that point in time underappreciate how unusual a moment that was.”
“That’s the key part,” says Wilson. “There was no private market solution available given that unique moment in time, so GM would have liquidated had the government not stepped in, and that would have wiped out the entire automotive supply chain.”
Pension Reform
In addition to his work in the auto industry, Wilson ran for Comptroller of New York hoping to give pension reform a shot. He shared his thoughts on how to fix the flawed public pension system in the U.S with me.
“In order to assess a problem you have to first understand the size of it. Bad accounting allows public pension officials to hide the size of the problem,” says Wilson.
“My simple solution to that is to subject public pensions to the same standards as private pensions. If General Motors or Verizon or AT&T – who all have private pension plans that their employees participate in – have to abide by a certain set of accounting standards, why do public pensions have a more lax set of accounting standards? If you apply the same private standards to public pensions, the funding gap that’s now estimated to be between a half trillion and a trillion dollars expands to be $3 trillion. That’s step one.”
Step two, says Wilson, is to hold politicians accountable for short term promises they make without factoring in the long term consequences.
“At least in New York, both Democrats and Republicans, for years, have been overpromising on pensions and basically creating a system that’s too expensive in order to win votes. They’re basically taking your and my future tax dollars and buying votes with them.”
“I think what really comes down to is having the proper accounting so that people understand the size of the problem, and then having watch dog groups that really press the issue when politicians overpromise with future tax dollars.”
Be sure to check back on Monday for Steve Forbes’ interview with Harry Wilson on Intelligent Investing.
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