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David Weidner's Writing on the Wall Archives | Email alerts
Aug. 2, 2011, 9:13 a.m. EDT
By David Weidner, MarketWatch
NEW YORK (MarketWatch) "” Spending is good. Borrowing is better. Washington is doing neither. It's liquidating.
I've been covering Wall Street and corporate America for going on two decades, and if there's anything I've learned it's that there are really only two kinds of companies: those growing and those shrinking.
The U.S. government today has officially become the latter.
The difference between a growing business like Apple Inc. /quotes/zigman/68270/quotes/nls/aapl AAPL -1.38% and a shrinking one such as Eastman Kodak /quotes/zigman/225448/quotes/nls/ek EK -3.87% has less to do with spending and revenue and than with psychology. Growing companies go through tough times. They adapt, and they're poised to strike when conditions are right. They don't stop innovating.
Defeated companies may be producing steady profits. But they lose their entrepreneurial spirit. They stop looking at the future. They get intimidated. They quit fighting. They look for a sale. They try to buy growth. They play not to lose "” and end up losing anyway.
Which of those does Washington sound like?
So, what would happen if Apple had to tackle the debt crisis? First, it would eliminate spending that's not working. Then it would make a commitment to spend if necessary. Third, it would look for ideas to spend on. Finally, it would call customers' bluff. How much are you willing to pay for what the government gives you?
Ultimately, what's happened to our government, lawmakers, elected officials and ourselves is that we've have taken on a mind-set of defeat. It doesn't seem to matter that the business model "” taxing for revenue, spending for growth "” isn't broken. After all, it's working in Germany, Canada, India and China.
We've given up on the model because of our debt situation. It's a problem, and a pressing one. A default or lower credit rating would cause further damage to our credit picture.
But there are really two ways to handle it. We could take a balanced approach of reining in spending and increasing revenue (cutting costs, raising taxes), or we could simply cut, slashing incomes (Medicare, Social Security, the military). These drastic cuts, which will balance annual budgets, are in effect a surrender.
They are based on the belief that revenues (taxes) won't rise through increased business activity, and that taxes can't be raised without scaring the private enterprise. In business terms, management is convinced sales won't be enough to pay the bills and that raising prices will drive away customers.
Again, this is more about psychology than profit and loss. Let's take a look at three winners in the corporate world:
Apple is the most cash-rich company on the U.S. landscape. But it wasn't always that way. Steve Jobs and Steve Wozniak borrowed money from an Intel /quotes/zigman/20392/quotes/nls/intc INTC -1.80% executive to start Apple. When Jobs returned to Apple in 1997, the company was losing money. It was psychologically on the ropes. Jobs borrowed $150 million from Bill Gates at Microsoft Corp. /quotes/zigman/20493/quotes/nls/msft MSFT -0.95% and overhauled the company, spending on ideas that worked, killing projects that didn't. You know the rest of the story.
Larry Page and Sergey Brin founded Google Inc. /quotes/zigman/93888/quotes/nls/goog GOOG -1.35% in 1995. The company was born out of a federal grant. Its first business funding came from a co-founder of Sun Microsystems. Then the company raised $25 million from venture capitalists. Google is also cash-rich, but it recently went $3 billion into debt because it needed to establish a credit profile.
David Weidner is the Wall Street columnist for MarketWatch. He formerly covered M&A and financial services at The Daily Deal, American Banker and Dow Jones... Expand
David Weidner is the Wall Street columnist for MarketWatch. He formerly covered M&A and financial services at The Daily Deal, American Banker and Dow Jones. He writes the Writing on the Wall column which appears Tuesday on MarketWatch and Thursdays on WSJ.com. He also is a regular contributor to the News Hub. Collapse
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