
Economic Reality - dforrestwilson
https://www.oaktreecapital.com/insights/howard-marks-memos
======
ctchocula
> Riding to work the other day, I heard about protests occurring in France.
> Workers were complaining about potential changes in labor regulations that
> would make their jobs less secure. In brief, French workers like it the way
> things are: they can’t be pushed beyond 35 hours a week, and employers’
> ability to terminate them is subject to a drawn-out, torturous and uncertain
> program. They also like their lengthy vacations and the extensive benefits
> provided by the state. The question is where the ability to pay for above
> average benefits will come from if neither the hours worked nor the
> productivity per hour is above average. Governments and regulations can’t
> produce prosperity.

This memo neatly glosses over where the productivity gains in the last 100
years have gone, and makes it seem as if it's fair for wages of the American
worker to stagnate while the megawealthy get all the profit. If a worker in
2016 can build a car in a-fourth the time it took a worker in 1935 to build a
car, why is it implausible for them to work 35 hours a week with better
benefits and more vacation time?

~~~
mac01021
> why is it implausible for them to work 35 hours a week with better benefits
> and more vacation time?

People could do that if they were all willing to live like people lived in
1935. It turns out that many (most?) people prefer to live a more expensive
lifestyle which requires more hours of work.

One consequence of this is that, since the number of people who prefer this is
large enough that they've established a norm in many industries which makes it
harder to find an employer willing to hire a worker that's going to put in
fewer hours.

If you do really want a 1935 quality of life, though, you can probably attain
it working 20 or 30 hours per week at a restaurant or supermarket.

It's important to note that this life could be _very_ different from what you
have now. You would likely live in a household containing three generations of
your family and seldom travel outside the town/county you live in, among other
things.

~~~
laaph
> It turns out that many (most?) people prefer to live a more expensive
> lifestyle which requires more hours of work.

I don't know that this is quite true. I have asked many employers for fewer
hours and more vacation time in exchange for less money. I am always refused.
I am frequently offered more money but never more vacation time.

I work as a contractor now, but even now my main client is begging me for more
hours. The only people I've seen who successfully negotiate for fewer hours
are those so vital to the business that they'd rather have that part time
employee than no employee at all.

Mind you that's anecdotes and all that.

> One consequence of this is that, since the number of people who prefer this
> is large enough that they've established a norm in many industries which
> makes it harder to find an employer willing to hire a worker that's going to
> put in fewer hours.

I actually see it as the ones with the power get to write the rules, and make
things seem normal. Even if I'd prefer to work fewer hours, I still need some
money to survive, and can't quite go jobless.

~~~
natrius
Buying lots of stuff from one person is cheaper than buying some stuff from
lots of people. This difference is caused by transaction costs—the effort
required to go from desire to purchased solution—and it's core to the theory
of why firms form in the first place[1]. Every employer wants as few employees
as possible to get a given amount of value because it costs less. They're not
against fewer hours just because they're mean or stuck in their ways.

[1]
[https://en.wikipedia.org/wiki/Theory_of_the_firm](https://en.wikipedia.org/wiki/Theory_of_the_firm)

~~~
phil21
This, and the fact that if you let your Rock Star(tm) have special treatment
of 25 hrs/wk and 8 weeks of vacation the folks who can barely get a day's
worth of productivity of that guy done in a week will complain incessantly to
the point of it being a real problem.

I say this having attempted to run a "egalitarian" team for well over a decade
now. I've learned some lessons along the way. Basically reality doesn't matter
to most people - perception does. If it's perceived that one employee is
getting "special treatment" the rest demand it, deservedly or not. It doesn't
matter if that employee does 5 times the work.

I still operate on the "Get your work done, and I don't give a shit if you're
on the beach while you're on Slack with me" premise, but I understand this is
only for a _very_ select subsection of employees. The rest simply cannot
handle it, and most companies take the easy/lazy way out and simply try to
treat everyone as an equal as it results in far less drama. I think this is
completely unacceptable, and high performers deserve to be treated as such.

------
antisthenes
10 pages of libertarian supply-side drivel from someone with a conflict of
interest that conveniently ignores all counter arguments or dismisses them as
political and "matter of opinion"

~~~
dforrestwilson
I don't agree with everything he says, but he makes a compelling point that
the rich will simply leave if taxes are raised too much.

I'm not sure what the solution is, but travel is one aspect of globalization
that seems to benefit the rich more than the poor.

~~~
crdoconnor
Which is why they're all _flooding_ in droves from New York over to New
Jersey:

[http://nymag.com/daily/intelligencer/2014/07/rich-people-
don...](http://nymag.com/daily/intelligencer/2014/07/rich-people-dont-leave-
ny-because-of-taxes.html)

Oh wait.

Gee I wonder if it's actually all bluster and empty threats.

~~~
twblalock
No, it's simply that a threshold exists at which people will move, and it
hasn't been reached yet. Like most of the problems discussed in the economic
reality article, this is a tradeoff -- people have clearly decided that they
are willing to put up with higher taxes to live in New York instead of New
Jersey. But surely you can see that there is a point at which it won't be
worth it for many people.

~~~
crdoconnor
Well, the sheer deluge of articles proclaiming an impending exodus every time
the idea of raising taxes is mooted and the lack of any evidence for these so
called exoduses has made me... skeptical.

Historically the highest US income tax rate was 95%. Guess what?

~~~
twblalock
It only takes a few one-percenters moving away from a state to drain tens, or
even hundreds, of millions of dollars from the state's tax revenue. I think
this was mentioned in the article:
[http://www.nytimes.com/2016/05/01/business/one-top-
taxpayer-...](http://www.nytimes.com/2016/05/01/business/one-top-taxpayer-
moved-and-new-jersey-shuddered.html)

------
csense
Answers to his issues with tariffs:

> First, such tariffs are probably barred under trade agreements that are in
> place. To impose them, we would have to abrogate those agreements.

So what? Those trade agreements were made under the assumption that they'd be
good for America. Now that we know they're bad for America, the assumptions
under which they were made are invalid.

> We have to wonder about retaliatory actions – wouldn’t other countries
> impose offsetting tariffs on U.S. exports that would further harm our
> manufacturing base?

We're a net importer. Tariffs in other countries would only really hurt if we
did a ton of exports.

> What would happen to our ability to refinance our perpetually growing
> national debt if China, our biggest creditor, decided one day it wasn’t
> quite as eager to participate in new Treasury financings?

Lower taxes and cut the size of government. Stop printing money and allow
interest rates to rise.

> What would rising barriers do to one of the main motivations behind the
> broadening of U.S. trade agreements since World War II: preventing conflict?

A tariff is not a wall. Trade would still take place and there'd still be
interdependence.

> Finally, but most simply, what American wants to pay 50% more for a
> cellphone than he does today?

An American who used to be unemployed or paid minimum wage, but has gotten a
much better job with an greatly increased salary because he no longer has to
compete with desperately poor people who will accept pay far below the US
minimum wage.

~~~
dforrestwilson
> So what? Those trade agreements were made under the assumption that they'd
> be good for America. Now that we know they're bad for America, the
> assumptions under which they were made are invalid.

Do we know that? It's easy to quantify slower income gains, but harder to
quantify lower costs for goods and services. I'm not even sure what the closes
proxy would be. Inflation?

>We're a net importer. Tariffs in other countries would only really hurt if we
did a ton of exports.

History has shown that tariffs do result in counter-tariffs, which end up
being unprofitable for both sides, driving up costs.

> Lower taxes and cut the size of government. Stop printing money and allow
> interest rates to rise.

100% agree.

> A tariff is not a wall. Trade would still take place and there'd still be
> interdependence.

But it is a barrier, starting as a low hurdle and tending to rise over time.

> An American who used to be unemployed or paid minimum wage, but has gotten a
> much better job with an greatly increased salary because he no longer has to
> compete with desperately poor people who will accept pay far below the US
> minimum wage.

Where and how do these new higher paying jobs come about?

~~~
twblalock
Another very harmful and insidious consequence of tariffs: by preserving non-
competitive industries that would not survive in a free market, tariffs delay,
and worsen, the inevitable collapse of those industries.

By hiding behind tariffs, we delay the replacement of non-competitive
industries with competitive ones. When we finally drop the tariffs and start
developing competitive industries, other countries will have had a head start
in doing so.

Our companies and workers will be behind their global competitors by years.
The countries which declined protectionism and developed competitive
industries when it first made sense to do so will reap the rewards.

Someone might point out that we could avoid this situation by simply keeping
the tariffs around forever. But that never happens. Eventually, the tariffs
will become unpopular because people will know that outside of this country,
the same goods cost significantly less. That gap is likely to increase over
time. The Oak Tree Capital article uses a hypothetical example of cell phones
being kept at a $150 price in the domestic market by tariffs, when they are
available at $100 in the international market. After a few years, they will
still be $150 here, but maybe down to $80 in the international market. A few
years later, they may cost only $50 internationally. They won't become much
cheaper in the domestic market because manufacturers will have no incentive to
lower prices, because they are protected by the tariff. Furthermore, if the
domestic manufacturers were capable of competing on price, the tariff never
would have been necessary in the first place. At some point, the tariff will
be too politically unpopular to be sustained.

It's worth noting that one of the contributing factors to the collapse of
communism in Europe in the late 1980s and early 1990s was the obvious and
increasing divergence in quality of life between the communist and capitalist
countries, and that protectionism and anti-trade policies in the communist
countries, along with attempts at central planning, accounts for much of that.
They had a good run, but they could not hide from economic reality forever
when their neighbors obviously had it so much better. That's why tariffs can't
survive indefinitely.

------
applecore
According to Buffett: "When I see a memo from Howard Marks in my mail, it's
the first thing I open and read. I always learn something..."

------
pm90
_> For example, lending people money can enable them to buy things today that
they otherwise mightn’t have bought until later (if at all). If a consumer
buys a boat today with money made available through a low-interest loan,
that’s a boat he won’t buy next year. Lending people money doesn’t alter their
lifetime incomes, meaning consumers may buy fewer boats later, when the loans
have to be repaid, causing disposable income to contract._

Is that really how capitalism works, though? I believed it was more like this:
making available loans at low interest rates stimulates the production of
boats to large levels. The sale of these boats at profits creates wealth for
the owner AND the employees of the boat making company. The employees spend
that money and stimulate economic demand; the owners/investors make great
profit and thus concentrate capital even more. This capital is then invested
in other ventures, perhaps even as low interest loans to other consumers.

Loans/Debt enable businesses, consumers and nations to create economic
activity NOW and accumulate the capital NOW; we don't know what the future
will look like but the concentration of economic power (i.e. capitalism) has
certainly played a most important part in technological progress.

~~~
marcosdumay
> The sale of these boats at profits creates wealth for the owner AND the
> employees of the boat making company.

The boat is wealth. The person selling the boat gives some wealth away, in
exchange of a monetary profit. That profit will enable him to buy wealth
produced by some other person.

Let's make things clearly.

\- There's the real economy. Here, work, capital, natural resources, etc are
used to create wealth. People create their valuables and exchange them for
things they value more, increasing the wealth of everybody.

\- There's the nominal economy. Here money is invested in acquiring resources,
that other people will spend money consuming.

In a simple theory, the real economy works alone and money is irrelevant. But
that theory seems to be wrong. In fact, people gladly raise prices, but resist
lowering them. That creates an asymmetry and the consequence is that the real
economy works well¹ when the amount of circulating money is constant or
increasing, but does not work well when it is reducing.

Now, finally, people getting loans makes the amount of circulating money to
increase, and paying them back makes it reduce.

1 - At least according to the mainstream theories. Also, only up to a certain
point.

------
paulpauper
_Faster economic growth? Both may be desirable, but efforts to clean up the
environment may conflict with faster economic growth._

It doesn't have to be that way.
[https://www3.epa.gov/airtrends/images/y70_14.png](https://www3.epa.gov/airtrends/images/y70_14.png)

But yeah there are tradeoffs

------
ZeroGravitas
Surely bankruptcy is the equivalent of forgiveness, not the equivalent of
hell? A debtors prison is the equivalent of hell.

This undermines his point that it's the fear of failure that drives business,
since bankruptcy laws reduce the impact of failure.

------
evo_9
I found it disappointing this lengthy article didn't touch on Basic Income at
all. It would have been helpful to see how that (potentially) slots into all
this.

~~~
twblalock
It doesn't slot in to economic reality. It is simply an unrealistic proposal,
for several reasons:

1\. A guaranteed basic income to every citizen, which would be enough for a
person to live on without a job, would cost more than the entire annual income
of the Federal government. Even if it didn't, people would simply vote to
increase their incomes until it did.

2\. It would be regressive: under most of the basic income plans that have
been proposed, people who are currently on welfare would get less money from
the government than they do now. On the other hand, middle class people who
don't need extra money will get it. Basic income would represent a transfer of
income from the poorest to everyone else.

3\. It would not replace existing welfare systems. People like to think that
it would, but political realities would prevent that from happening. When has
the Congress ever passed a simple, elegant piece of legislation that undid
layers of bureaucracy, and then prevented it from being changed? It's simply
unrealistic to assume that could happen in our political system.

4\. Political, ideological, and moral forces in our culture and society have
caused us to have our current welfare systems, and those same forces would
cause us to revert to those systems even if basic income were implemented.
Some examples of these forces are the social constructions of race and class,
views about who deserves money and who does not, and the moral value of work.
Basic income is a blank-slate social engineering fantasy that ignores all of
these things.

5\. Basic income is likely to be a race to the bottom. You cannot redistribute
wealth that does not exist. By decreasing incentives for work, basic income
will reduce the amount of wealth created, which will reduce the amount of
money that can be distributed to people as their basic income.

6\. If steps are taken to incentivize work to avoid the problem in #5, e.g.
increasing the basic income payments to people who have jobs to incentivize
other people to get jobs, basic income won't be "basic" anymore. Such
incentives would open the door to many other proposals that would result in
some people getting more basic income money than others. Many of these
proposals will be popular, such as extra money for single mothers, less money
for convicted felons and drug users, etc. The forces I mentioned in point 4
would thereby reconstruct our current welfare systems within the framework of
the basic income policy.

~~~
bcheung
I like the Geo-Libertarian idea of basic income. Thomas Paine wrote something
similar in Agrarian Justice.

It basically goes like this:

1) Governments have claimed a monopoly on the land and resources. Basically
through military conquest at some point in the past.

2) Before there was any government people were able to use the land freely. So
basically they were robbed of something that they could previously use.

3) Fairness dictates that compensation for such a loss must be made.

4) Charge people for the use of land, resources, airwaves, etc.

5) This income goes to all people in the country equally.

This type of basic income does not violate any economic reality that I am
aware of.

Now, it will not be enough to so that people can choose to live without
working. Such thinking is anti-reality. Absent work, decay (entropy) is the
law of the universe. This can not be changed. But it will be fair compensation
for no longer having access to the land resources that hunter / gatherers had.

------
moneytide1
"they had, in fact, been able to acquire vast amounts of wood for $50 a cord,
and they’d been able to sell all they had for $40 a cord. How could they be
broke? "

By losing $10 per cord?

~~~
shostack
While I get the joke, the question is accurate.

If I had $1000 and bought 50 cords of wood at $50/cord, and could only sell
then for $40/cord, I'm left with $800. I took a $200 loss, but I'm hardly
broke.

I'd go so far as to argue that this is a common occurrence in business when
they haven't identified scalable marketing channels. Often you have to spend
at a loss to gather data, optimize your efforts, and THEN hopefully make a
profit.

So if I can take that remaining $800, optimize my efforts, and sell them for
$51/cord moving forward (assuming no further optimizations), it will take me a
little bit to earn my initial cash back, but I'm in essence printing money at
that point.

~~~
wargame
I took it to mean, that they had to buy more to cut costs, fuel (less trips),
economies of scale etc. Your way is interesting!

~~~
shostack
Heh, well, I'm a marketer, so that model is the basis of my job. It is very
rare to be profitable right off the bat. A lot of times you hear all the
success stories on how a company hit viral growth, but what you don't always
hear are how many of their strategies and tactics bombed and were tossed.

------
6stringmerc
> _Rather than believing central banks can make economies more productive,
> it’s my bottom line that there’s a naturally occurring growth rate for each
> economy, and that rate dictates the long-term output, not central bankers’
> actions._

While I don't disagree in general principle, I simply don't find this
observation or belief all too compelling or unique as it's being framed in
political context. Ever since Greenspan the Central Banking "toolchest" has
been of questionable merit and practical utility. If anything, the asset
buying irrational market behavior result (see: US stocks) disconnecting record
highs from real-world growth or economic engine performance only seems to
acknowledge the "naturally occurring growth rate" concept has merit.

Granted, some people don't like talking about how a negative growth rate can
be natural too.

> _The U.S. government couldn’t figure out how to stop it in the 1970s, and
> the nations of the world can’t find a way to start it today._

Oh, they can find a way, they just would prefer not to, methinks.

