Transcript
WEBVTT
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Today I want to take a look at Senator Romney's opposition to the proposed Tax Bill.
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More broadly, I want to talk about how trying to apply the rules of business to the government on a one-to-one basis can often lead to well-meaning, but disastrous results.
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Let's have a listen.
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Well, first of all, it's not a good idea to tell billionaires, don't come to America, don't start your business here.
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To tell the Steve Jobs and the Bill Gates and people like that, this isn't the place to begin your business go somewhere else.
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That's a bad idea.
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But number two, you're going to tax people not when they sell something, but just when they own it and the value goes up.
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And what that means is that people, these multibillionaires can look and say, I don't want to invest in the stock market because as that goes up, I'm going to get taxed.
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So maybe I will instead invest in a ranch or in paintings, or things that don't build jobs and create a stronger economy.
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Come On, Don't Bullshit Me!
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It's not like the Saudi crown prince or a Russian oligarch, you know, Oleg Smichnaev, is going to come here and build businesses.
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Welcome"Come On, Don't Bullshit Me", where we peel away the messaging of talking heads to get to the crux of today's issues.
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You know how there's this expression that you learn best from your failures or your mistakes?
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Well, one of the mistakes that I've made that lives rent-free in my head is: during HSBC-- an AeroSpace Basic Course, which is a finishing school for the Air Force officers, so during that course, they have this knowledge exam.
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And one of the questions on the exam was: the Department of Defense, DoD, wants a jet fighter, a new jet fighter; what jet fighters should be funded?
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And there was a bunch of choices.
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One of the choices was, whichever one fits the overall mission of the Department of Defense, of the DoD, whichever one fits the current prevailing doctrine of the day.
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Another one was, whichever fighter is the most technologically advanced.
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Then the third option was, whichever fighter is the most cost-effective.
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And then the fourth option was, whichever one spreads its costs out the most amongst all the different states of the union.
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And then they had different options: A only, A and B, or A and C.
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It's like the classic SAT test.
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Being a scientist.
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I picked the answer"Whichever one is most technologically capable" and"Whichever one fits the prevailing doctrine of the day".
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And in my rationale, well, obviously as a scientist, clearly, I was a dead ringer for the"Whichever one is technologically most advanced", because that was my whole purpose of being in the military-- to make the most technologically advanced weaponry.
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And then my logic was: we are in a military school here about officership, so, obviously, the other answer is going to be about how the jet fighter fits into the doctrine.
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Because if your doctrine calls for more tactical fighters, rather than bombers, then you're not going to waste money on a bomber.
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Uh, actually, an interesting story.
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The F-117, which is now retired, is obviously a bomber, but the reason why it's an"F" was because the prevailing doctrine of the day was that we were not going to spend any more money on bombers.
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So the Air Force with infinite wisdom created a bomber, but then gave it an"F" designation.
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Oh yeah, this is totally a fighter, the F-117! And Congress bought it! And we got it funded.
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And of course it was awesome for two wars that it was in.
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But then, obviously, it outlived its purpose.
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But anyway, that is a side note.
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Anyway, so, I was like, okay, clearly, because this is an officership finishing school, it has to fit the prevailing doctrine.
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And I'm a sucker for technology, being a scientist, so, obviously, technologically advanced one was there.
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Because I thought, oh, the cost-effective one is a complete trap because that's the thing that they're trying to teach us here: that you don't go for the cheapest thing.
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You go for the thing that's most effective for the money that you have.
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So there's that old joke: oh, military equipment sucks, because it goes to the lowest bidder.
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Well that actually is not really true anymore.
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It's more about where it can give you the most benefit for the lowest cost, not necessarily purely lowest costs.
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So I was like, okay, cost-effective answer.
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That's purely bait.
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And then I didn't even look at the"Whichever one spreads the cost amongst all the states", because that was obviously a stupid answer.
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So I was like, all right, l was confident.
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And of course, when we got our test results back, I got that answer wrong.
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The actual answer was"E: all of the above".
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I was like, what?
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This is ridiculous! I was like, okay, fine, I could get the cost effective, cause budgetary requirements.
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But then the spreading the cost amongst all the states?
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Like, who gives a rat's ass about how the thing is funded?
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But then during the post-mortem of the exam question, it was a bait question, because each of those different options was from the perspective of a different portion of the stakeholders, if you will, of the defense industry.
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The first one,"Whether fits within the prevailing doctrine", was obviously from the perspective of the Office of the Air Force-- the generals and flying community and whatnot.
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And then B-- the most cost-effective one-- was from the perspective of the accountants or CBO about being a good steward of taxpayer money.
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So you want something cost-effective.
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C was obviously from the perspective of scientists and engineers of the Defense industry: you want most of the technological advanced jet fighter.
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And then D was the perspective of the Congressmen and Senators of the legislative branch.
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And that this was the real profound thing, this is why I still lives rent-free in my head until this day, even though it was 20 years ago or whatever.
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It is that the Department of Defense doesn't live in isolation, neither the executive branch lives in isolation.
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You have to consider the stakeholders being the legislative branch.
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And let's say the branch represents the people and the country, and it doesn't live in an isolated manifestation of itself.
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The government is"of the people, by the people, for the people", blah, blah, blah.
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But the point here is that the government represents the people.
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And one of the functions of the government is to provide the wealth spread evenly across the land.
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So all things being equal, you don't want a jet fighter, that's being built in one specific area, because then only the citizens of that specific area, or that specific state, or that specific congressional district get the benefits from the taxpayers funding.
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But if you spread the costs of the jet fighter throughout multiple different congressional districts...
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This actually is a kind of a mischievous thing to it: the more congressional districts that you spread this around, obviously the less of a chance there will be that it's going to get canceled, because more Congressmen are going to support it.
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So, I mean, there's that, but the higher purpose of that is, of course, more Congressmen are going to support it, and there's going to be less chance of it getting canceled, because the point is that the citizens of the country, represented by their representatives, their Congressmen, they're rightfully owed taxpayers' money that the government spends, right?
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Because whenever the government spends goes to the taxpayer, ultimately.
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So you want to spread it out, even at the cost of it being not cost-effective.
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Because, obviously, it'd be much more efficient to build a jet fighter in one factory, but that's not the point of the government.
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The government is not a business.
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It's there for the general welfare of all, of everyone.
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So from the perspective of the legislative branch, of the Congressmen, Senators, the best jet fighter is the jet fighter for which the costs are spread amongst the most congressional districts feasibly possible.
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And that was a kind of a wake-up call for me, because, I mean, we all kind of know this instinctively, when people tell you this, that, of course, the government works for everyone.
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But you don't really internalize it.
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And that question really internalized it, because I realized that it was not just about building the best fighter or the cheapest thing for the taxpayer.
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Because we always think about the taxpayer as like this one monolithic entity.
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But the taxpayer is not just one person, it is 300 million or whatever the population is.
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Well, the adult population.
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And the officers, the leaders in the Department of Defense-- this is something that we have to be mindful of.
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That whatever decision we make, particularly in peacetime, we have to make sure that not only does it advance the agenda of the Department of Defense, but it also advances the agenda of the people, represented by the legislative branch.
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So I still remember that to this day, this question and that concept, that it's not about pure efficiency.
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It resonates with me throughout my career.
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There's a saying in DARPA, that to optimize the whole, we need to sub-optimize the parts.
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I learned this, obviously, working as a scientist in the Defense acquisition community or the R&D wing of the DoD.
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And after I left the military, in Business School they gave us a whole bunch of different literature to read, whether it's case studies or books, or what have you.
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And obviously, Business School is kind of a party time.
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So you don't really do most of the reading, or you do a cursory reading of it-- just do enough to pass the assignment.
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So you do like whatever little readings possible and get it back to partying.
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So, one of the assignments was to read about operational efficiency.
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And we were tasked to read this book,"The Goal", I think it was.
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It was a fictional story of this plant manager, and his plant is not working, all the metrics, all the numbers are down.
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And then the Headquarters is going to shut down factories, and this factory is targeted, because, obviously, the numbers are bad and this guy comes in, the new plant manager, and he has like 90 days to fix the numbers, otherwise plant is going to be shut down and then the small town is gonna lose all these jobs.
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And then there's this iterative process where they're trying to deep dive into the problem and try to figure out why the numbers are down.
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Because everyone seems to be working their ass off.
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And then h e r ealizes, okay, well, I g otta make this g roup efficient, because their numbers are down.
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And then they talk about the lean principles and s ay, oh, you know, we need to minimize the floor space and the walking around the floor space, or minimize the footprint of the inventory.
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So they do all these things, but no matter what they do, they realize that nothing is working, because the numbers go down for that specific area, but then overall the plant numbers do a little dip and then they go back up again.
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The moral of the story is, what he realizes is that he's been trying to make each of the different departments efficient.
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So whenever he sees an inefficient number or a department, he tries to do all the efficiency things that he learned as a manager to get those numbers down.
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But those efficiency numbers don't help the overall plant to get its numbers down.
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And then I'll, I'll save you the three hours of reading it, or whatever, especially if you're a business school candidate, you can just listen to this podcast and ignore the assignment altogether and get back to drinking.
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But the moral of the story is: at the end is that he realizes that he needs to make the numbers inefficient for each of the different departments.
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And that is somewhat related to Just in Time, but not really, but basically he needed to get each of the departments to work in tandem with the other departments that feed to it and it feeds to.
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So if it's department B, the department B needs to worry about how they're getting the work load from department A, and then also how the department B gives their workload to the department C, irrespective of the efficiency of B.
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Because he didn't want apartment B to be super efficient and then waiting around for department A or overload department C.
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And that was the points, it is that you can be inefficient, you can have some downtime in your department, so long as that workload is continuously moving through department through B, through C.
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And then only when they did that did the overall plant numbers starting to drop.
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And at the end he saves the plant and he's a hero.
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And then the town is saved from headquarters decision and they keep their jobs.
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And the whole point, again, is that when you look at each of the departments, they weren't working as efficiently as possible, but overall the concerts of all of the departments working together in tandem-- that overall number became efficient.
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And that's what ultimately drove the metric of the plant down.
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It reminded me of what we kind of just took for granted almost in the military acquisition world, that to optimize the whole, you need to sub-optimize the parts.
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And I realized that this is not just, you know, a nice thing that we used in the cream of the crop of Defense R&D.
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This goes for all complex organizations, not complicated, but complex organizations.
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And the Government is no exception.
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So kind of like...
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I just took you to Switzerland to build the watch, but now we're back.
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And this is what I want to really address, is that the Government is, arguably, one of the most complex entities out there.
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And you don't want to look into a specific departments of the Government or sub- agency, whatever you want to call it, and try to maximize the efficiency there, because that may not be necessarily best for the overall Government.
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Again, just like that test answer to the question on that exam about the jet fighter, it is not necessarily about making the most cost effective jet.
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It is about spreading the costs out, so that multiple congressional districts get to benefit from the program.
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[ Music]
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So, what does this have to do with Mitt Romney's answers to the wealth tax bill?
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He was saying, oh, well we want all these billionaires to come here.
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And if we tax them, then they won't come to do these jobs.
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And then, you know, I'm looking at this, ok, this guy, I mean, obviously, everyone knows he is full of shit, right.
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But there's just talking points that the Republicans have, and then they're just giving them out, because they obviously don't want the bills to pass.
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We're not going to talk here about whether the wealth tax in general is good or bad.
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Frankly, I'm not even qualified to talk about it, because at first glance I'm thinking, right, taxing on unrealized gains is obviously not a good way of taxing.
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So let's say you just bought a stock and then the stock just ballooned in price, right.
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And then it dropped in value.
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And then, depending on the IRS reporting time, you just got stuck with a huge tax bill, even though your realized gain is actually a loss, or whatever.
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Right?
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But I think there's a lot of stuff in there in the language of the bill that prevents such scenario.
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So, I think that's just me being alarmist.
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But again, not having read the entire thing myself, I do not want to comment on that.
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But what I do want to comment on is just this constant mantra, if you will, that people on the Right like to echo.
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About how billionaires are the saviors of the country, and if we don't appease, the billionaires, somehow the entire country is going to collapse.
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Never mind the fact that this country wasn't built by billionaires.
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We like to say, oh, you know, we're a rugged individualist, and America was built by industrial and entrepreneurial people.
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The middle-class if you will.
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Right?
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So the general concept about how billionaires are supposedly the saviors of America, and without them we can't do shit, it's just completely ludicrous.
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First off, Mitt Romney's talks about, oh, if we have this bill then billionaires aren't going to come to America and create all these jobs.
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This is ridiculous.
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Like, what billionaires are coming to America?
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It's not like we have multibillionaires queuing up at JFK or LaGuardia, waiting to get into this country to create jobs here.
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It's not like, uh, the Saudi crown prince, or a Russian oligarchs, you know, Oleg Smichnaev, is going to come here and build businesses.
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This is targeting currently existing Americans.
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And the billionaires that we're talking about are Americans that actually live here.
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So this concept of,"oh, we want to attract more billionaires to come to America", is completely ludicrous.
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That's the first thing.
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And then secondly, it's not about the taxes.
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It's about the opportunity to make money.
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No one gives a shit about taxes.
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And this is another thing that you learn in Business School is that you first worry about the business itself: getting the revenue, gain the Free Cashflow, if you will, because that's another thing, there's a difference between Revenue and Cashflow.
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Worry about the expenses, the Balance Sheet, and you have your Income Statement, right?
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That's what you worry about.
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And then there's even the terminology for it: it is called EBITDA.
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Earnings Before Interest, Taxes, Depreciation.
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And that's what people look at when you're talking about investing, when you're trying to court investors, public or private.
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Everyone likes to talk about EBITDA.
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And the entire business world is laser focused on EBITDA.
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Or let's just go with EBIT, because the Depreciation and Amortization aspects of is are relatively a newer or refined concept.
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So, rather that to minimize the number of syllables here, let's talk about EBIT.
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So, Earnings Before Interest and Taxes.
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And that's the point of these supposedly billionaires or multi- billionaires, as Romney's saying.
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They don't give a rat's ass about taxes.
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What they care about is maximizing their EBIT, the Earnings Before the Taxes.
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And only afterwards, then they have their army of accountants and lawyers or whatnot to find the different loopholes to minimize their tax burden.
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So, taxes are kind of an afterthought.
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And if there's an opportunity in America, you bet your ass, these multi- billionaires are going to come here and, quote, exploit us, exploit our country.
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And he's a, he's a Bain guy, he's from Bain Capital-- one of"The Big Three" management consultants.
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He knows this.
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He's not an idiot.
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But it's just lip service that he pays, because it sounds, remember last week we talked about"the useful idiots"?
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It sounds good and resonates with the"useful idiots".
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Like, oh yeah, billionaires! They care about taxes.
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And if we tax them too much, they won't come here.
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It's complete horseshit, because what matters is the earnings before the taxes, and after taxes is always an afterthought.
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And now I know that someone here is going to say, well, EBITDA-- that's completely horseshit, because there's the double Dutch, the Irish sandwich or whatever the hell it's called.
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And there's all these tax schemes, and going to the Cayman Islands, Barbados, or whatever: companies moving their Headquarters outside of the United States to avoid taxes.
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Well, yeah, yeah, that's true.
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And that's something that, we should worry about and rightfully so, but the point here is that their Headquarters are moving there.
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It's on the books.
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It's not like when Apple moves to Ireland or the Netherlands, it's not like the Apple Headquarters in Cupertino is moving there.
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No, their actual physical Headquarters of where they're doing their operations, where people are being employed, is still in Silicon Valley.
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It's still in California, because that's where the talent is.
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That's where the people who are working are.
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It's just what is on the accounting books.
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That ethereal entity is what's moving there.
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So, I don't really give too much credence to people saying, oh, well, that's ridiculous because you can always move your Headquarters to Ireland or some other tax Haven, and that's why what Mitt Romney is saying is true, and we need to lower the taxes for the billionaires.
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No, because that has nothing to do with employing people.
00:20:50.200 --> 00:20:56.710
Well, maybe a little bit, but from the overall grand magnitude of operations for a company, it has no bearing at all.
00:20:57.130 --> 00:21:06.339
Every Business School will tell you this, any person without a political agenda, who was in the business world will tell you, what matters is your EBITDA, your Earnings Before Interest and Taxes.
00:21:06.609 --> 00:21:13.720
Later on you can do whatever the hell you want to minimize your taxes, but that's only after the operations and their earnings that you've earned.
00:21:14.640 --> 00:21:23.710
The third point goes back to the story that I was talking about: the optimization of the whole implies, the sub-optimization of the parts.
00:21:24.460 --> 00:21:32.650
The thing is, multibillionaires are not healthy for the economy or for our country.
00:21:33.550 --> 00:21:44.470
Going back to that test question, it's not about getting the most cost effective jet fighter, It's about spreading the wealth to as many congressional districts as possible.
00:21:44.769 --> 00:21:46.299
That's the point of the Government.
00:21:46.720 --> 00:21:50.680
A side note: this is one of the reasons why you should be very cautious...
00:21:50.681 --> 00:22:06.549
I'm not going to tell you to not vote for, because who am I to tell you who to vote for, but you should be very cautious of candidates whose whole spiel or their whole shtick is that, oh, I'm a businessman and I've run successful businesses, that's why you should elect me into the government.
00:22:07.390 --> 00:22:16.509
Even if it's true, which most of the time, it's not: they're usually failed businessmen, because why the hell would you quit being a successful businessman going to a, having a government job, right?
00:22:16.960 --> 00:22:18.160
But that's besides the point.
00:22:17.770 --> 00:22:26.980
The thing is that businessmen deal with efficiency and consolidating wealth into the parent's organization.
00:22:27.430 --> 00:22:28.750
That's the point of business.
00:22:29.259 --> 00:22:31.240
Whereas the Government is the opposite of that.
00:22:31.240 --> 00:22:38.230
You don't want the Government to be efficient, because efficiency necessitates consolidation.
00:22:38.710 --> 00:22:41.920
And the more you consolidate wealth, the more you consolidate power.
00:22:42.490 --> 00:22:45.460
I mean, this is why we fought the war of Independence.
00:22:45.490 --> 00:22:47.619
It was against the monarchy, it was against the king.
00:22:48.190 --> 00:22:55.119
More generally, we fought war against the British parliament, because the wealth and the power was concentrated with the parliament.
00:22:55.150 --> 00:23:00.730
And we as colonists, didn't get a say to the laws and the taxes that were being enacted.
00:23:01.210 --> 00:23:08.170
So the whole founding of our country was about being averse to the concentration of power.
00:23:08.589 --> 00:23:16.210
Or in the confines of this podcast, it is about the efficiency of power: the more concentrated the power is, the more efficient is.
00:23:16.750 --> 00:23:22.869
So if you want a really efficient government, forget about democracy or, you know, liberalism.
00:23:22.871 --> 00:23:24.490
And I use"liberalism" like little"L".
00:23:24.509 --> 00:23:29.710
I'm not trying to be a left-wing or right-wing thing, but classical liberalism, if you will.
00:23:30.279 --> 00:23:34.329
You forget about all that and just have a autocratic monarchy.
00:23:34.930 --> 00:23:37.359
Kind of like Saudi Arabia, or whatever.
00:23:37.869 --> 00:23:47.480
And then there you go: you have a very efficient power structure, and power is consolidated in, essentially, one person, and they dictate, whatever they say goes.
00:23:48.019 --> 00:23:53.210
And that for the rugged individualistic Americans that we are, obviously, that's a no-go.
00:23:53.299 --> 00:24:00.740
The whole point of the constitutional convention was ensuring that we didn't have another king, right?
00:24:00.740 --> 00:24:09.619
Remember when we elected George Washington, some of the founding fathers said we didn't fight a war to replace one king George with another king George?
00:24:09.980 --> 00:24:13.789
And thankfully George Washington retired.
00:24:13.790 --> 00:24:19.069
He was kind of like Cincinnatus, that famous general from the Roman Republic.
00:24:19.490 --> 00:24:20.240
That was a big thing.
00:24:20.259 --> 00:24:24.829
He retired and allowed the next group of leaders to come and take his place.
00:24:25.069 --> 00:24:26.720
So, we avoided that crisis.
00:24:27.200 --> 00:24:43.579
And we did all this stuff 200 years ago, all of that, not to be outdone by some Bain Capital know-it-all Mitt Romney, who thinks that the best thing to do is to have consolidated wealth and to consolidate power in the form of multibillionaires.
00:24:44.930 --> 00:24:46.160
I want to make a side note here.
00:24:46.640 --> 00:24:51.019
We'll get back to this point, because I always like to Steel-Man these arguments, right?
00:24:51.470 --> 00:24:53.150
So I'd like to take him at Good faith.
00:24:53.539 --> 00:25:13.940
Let's let's take him at his word, let's think Mitt Romney is at his word, and let's assume we do want multibillionaires, these really powerful entities, whether it's individual billionaires or billionaire estates, we want these big powerful multibillionaires to come here to create jobs.
00:25:14.359 --> 00:25:15.829
Well, why stop there?
00:25:15.830 --> 00:25:18.049
Why stop at billionaires or multibillionaires?
00:25:18.050 --> 00:25:20.690
Why don't we go into the trillionaires and multi-trillionaires?