Circle of Competence Issue #48

February 9, 2019

Quote of the week: "I contend that for a nation to try to tax itself into prosperity is like a man standing in a bucket and trying to lift himself up." - Winston Churchill 

 

 

FOOD FOR THOUGHT

 

January 30th, Howard Marks released his latest memo titled "Political Reality Meets Economic Reality." In this magnificent piece of rhetoric, he goes after both the conservative and liberal pet causes of the day. Marks addresses protectionism and populism on the right and rising anti-capitalist sentiment on the left with poignant arguments, ending with a great vignette on America's tax scheme. Regardless of your political position, I'd highly recommend reading this politically balanced, thoughtfully written letter.

 

I come from a small town, Rocky Mount, NC, which was home to a large textile mill up until 1996 when it closed down due to the signing of the 1994 North American Free Trade Agreement. There was significant "economic road kill" from NAFTA after 1993, as Warren Buffett has often said of free trade. Some may disagree with me on this, but I still stand firm for free trade. It improves purchasing power and quality of life for all American citizens, but at a very costly price to a small number of citizens whose industries are relocated to lower wage countries. On the other hand, when tariffs are used to discourage free trade, it may save some local jobs, but at a massive economic cost to the rest of American citizens. As Marks points out in his letter, using the tariffs on automobiles as an example:

 

"Thus increased tariffs on automotive imports could bring about:

 

- an increased price on all cars bought in America

- a resultant decline in the number of cars sold

- tougher times for manufacturers, dealers, support businesses and their employees, and

- thus a general contraction of the economy"

 

The cost of tariffs reverberates throughout the economy as they are passed on to consumers, which harms their purchasing power and ultimately the American economy.

 

I wish however, as Buffett has so keenly observed, that the "economic road kill" that is left behind from free trade agreements would be addressed to a greater degree. In the CBO's 1994 NAFTA paper, there are mentions of employment assistance and trade adjustment assistance, but we need more from our legislatures on picking up those who have been left behind. We need policies that encourage free trade that will benefit tens of millions of consumers as well as policies that will retrain and re-educate those affected most by industries that pick up and move to another country. It isn't enough to simply insure a man's wages and give him handouts if his job is eliminated due to a free trade agreement. A man doesn't want a handout, he wants meaningful, gainful employment. Much more than entitlement payments, a new job goes much further in restoring his place and dignity in society. In a country as rich and wealthy as America, there is no good reason that those affected most negatively by free trade agreements must remain untrained, unemployed, and unmarketable in the labor force. Towns like Rocky Mount simply needed more assistance from their fellow countrymen who benefited enormously from the cheaper textiles and goods flowing into the country from Mexico. 

 

In the second portion of Marks' letter, I couldn’t agree more with his treatment of current anti-capitalist sentiment in Congress. Where would America be today if not for the entrepreneurial spirit, the free market, free enterprise, and freedom to choose one's own economic path? One must seriously question the assumption of Senators such as Senator Alexandria Ocasio-Cortez, that capitalism is 'inherently oppressive.'  Just this week, Senators Chuck Schumer and Bernie Sanders authored a New York Times Op-Ed suggesting that there be regulations on stock buybacks for companies because they were not treating their employees well enough. Elizabeth Warren has introduced legislation that would call for 40% of boards to be represented by labor. Cory Booker has introduced legislation that would require a stock buyback to be matched with a worker/employee bonus or 50% of profits above $250M. While the motivations are laudable - namely better wages and treatment of workers - are these not driven directly by blow back to Trump-esque populism? Are these not politically motivated, geared towards a populace that is at a 50 year low in terms of economic inequality?

 

Marks sums it up by writing (and let me be clear, I am in agreement here):

 

"I absolutely am not writing to defend stock buybacks or criticize labor representation on boards. What I oppose is (a) the idea of governments deciding how companies will be run and (b) the appropriation of corporate economics for parties other than their owners."

 

Classical American Liberty at its best.

 

While I am an ardent supporter for free markets and free enterprise, I will grant that there is an urgent need for more competitive forces in the marketplace. There has been far too much consolidation in the healthcare, finance, insurance, and many other industries, with workers' wages, consumers' purchasing power, and communities suffering as a direct effect. But is the cure less capitalism? I would say the opposite - that we need more capitalism and more competitive markets so that capitalism can function best for who it was always meant to benefit - the consumer (Adam Smith). These trends will shape our economic and political futures, and as Marks so aptly observed, they represent what happens when Political Reality meets Economic Reality.

 

 

Have a great week!

 

- Benton

 

 

WRITTEN WORD

 

- TOP READ: Howard Marks' new memo "Political Reality Meets Economic Reality"

 

- The rise of the robot reporter (New York Times)

 

- The Rational Walk on capital allocation and share repurchases

 

- Joe Koster shares Buffett's wisdom on share repurchases from annual letters (Value Investing World)

 

- Transparent hospital pricing reveals wild fluctuations (Kaiser Health News)

 

- The death of clothing (Business of Fashion)

 

- Will fusion energy become a reality?

 

- How a monster Texas oil field made the US into a world star (New York Times)

 

 

SPOKEN WORD

 

- TOP LISTEN: Kevin Clayton (CEO of Clayton Homes) interview post Berkshire Hathaway acquisition (H/T Neil O.)

 

- Matt Hougan discusses cryptocurrencies with Barry Ritholtz

 

- Jonathan Tepper on understanding bear market investing (The Investors Podcast)

 

 

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