Circle of Competence Issue #48
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.