Subject: Economic Reality – Jun’16
In this memo, Howard Marks laments that most people don’t really think about (and do not have the knowledge to think) whether something is economically feasible, or not.
Economics is ultimately the study of choices. Our resources are limited, and hence we need to make choices. If we need to get good grades at school, we need to sacrifice leisure – we can’t have both good grades and lots of leisure time. We need to make choices, and there is no escape from this reality. Yet, most people do not get this basic idea right.
Making choices mean saying no to something. Higher minimum wages could lead to better wages for the low-paid workers, but could reduce business profits which might lead to lower employment creation. Moving jobs to the US from China will increase employment, but it will lead to higher cost of living due to increase in prices of goods consumed. Tax the rich at higher rates, and they will leave the country, resulting in loss of the entire tax revenue from them.
Howard Marks rightly points out that central banks cannot create long-term impact on economic growth. They can only stimulate it in the short-run, or help avoid devastating financial catastrophes.
Fundamental improvements – intelligent changes in investment incentives, the tax system or infrastructure, for example – can increase the slope of the growth curve and provide substantial net long-term benefits for a society (although not necessarily for every individual member). Short-term fixes simply cannot create wealth out of thin air.
“We contend that for a nation to try to tax [or stimulate or devalue] itself into prosperity is like a man standing in a bucket and trying to lift himself up by the handle.”
Source of Memo: Oaktree
Please read the original memo here
Image source: Oaktree Twitter Feeds