Tuesday, May 31, 2016

Recommended reading: Howard Marks on Economic Reality

Howard Marks did not build a highly successful money management firm (Oaktree Capital) by ignoring the fundamental truths and the basic laws of economics. In his latest memo, "Economic Reality," he explains simply and eloquently why it is that a) monetary policy cannot stimulate an economy or create growth, b) governments cannot create growth by subsidizing industries, c) government regulations (e.g., minimum wage laws) cannot produce prosperity, d) higher taxes on the rich cannot make an economy stronger or increase the general welfare of a country's citizens, e) higher inflation mainly benefits governments with big debts, at the expense of its citizens, f) devaluing one's currency cannot strengthen an economy, g) bringing jobs back to the U.S. is not necessarily going to raise our standard of living (and Trump's promise to impose huge tariffs on Chinese goods is crazy), and h) redistributing wealth and central planning are sure-fire ways to destroy an economy.

I highly recommend this memo to everyone. It's long, but chock-full of wisdom that is sorely needed (and distressingly lacking) in today's political debates.


Nudge said...

Sounds right up your supply-side alley, Scott.

"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). "

Are you ready to support investment in public infrastructure?

Frozen in the North said...

Very interesting commentary, and much "conservative" in his view of the world than CBP. One thing for sure: the rise of the demagog (Sanders or Trump is something he is very concerned with, far more than CBP implies in his summary. Clearly government have limited impact, they cannot create economic growth, taxation is an arcane science that is really at the center of a philosophical debate on the "correct taxation level", that suffered from Pareto efficiency risk.

BTW fascinating article in the Atlantic about Trump -- written by David Frum...

Scott Grannis said...

I'm skeptical when it comes to more infrastructure investment, especially if implemented at the federal level. I don't believe a small group of "wise men" in Washington know what is needed in every nook and cranny of the country. t's best kept to the local level. Marks is a supply-sider to the extent he believes that people respond to changing incentives; as he notes, reducing marginal tax rates could provide genuine economic stimulus. I'll go further and assert that current marginal tax rates are too high and that the economy would be much better off if they were reduced.

Frozen in the North said...


One problem; private enterprise rarely pays for bridges, water and other infrastructure goods. The truth is private enterprise needs the infrastructure. Its a key component, from roads, to railways to bridge -- even public transport that its workers use to get to their jobs in the morning.

BTW, most infrastructure (especially the replacement kind) is engineering driven. How many cars, what shape is the bridge in. The Federal or state government is equally poorly place to make these decisions.

Hans said...

I only wish that Mr Marks was siting in the White House.

America, badly needs his wisdom. Emoticon and ideology has
replace common sense!

Benjamin Cole said...

Lots to appreciate in the Howard Marks memo. Always is.

However, keep in mind that Milton Friedman said that too-tight money caused the Great Depression, a recession in 1956-7, and too-slow growth in the early 1990s.

Today money is too tight, and it appears that the Fed is actually propping up interest rates with its mysterious reverse repo program. Can we normalize interest on excess reserves?

We have heard now for seven years, if not decades, that the Fed is too loose. Yet the latest PCE deflator came in at 1.6% yoy.

It is an odd story, but President Obama and Janet Yellen have overseen inflation rates at about one-third of those experienced during Ronald Reagan and Paul Volcker.

The globe is glutted with product and commodities.

Central banks are too loose?

Hans said...
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