Latest memo from Howard Marks: Political Reality
My last memo, in May, was on the subject of “Economic Reality.” Its goal was to describe the realities imposed by economics and point out the many ways in which governments and, especially, candidates for elected office ignore and promise to override them. Since then I have been struck by the way developments have moved economic reality to center stage. Of course, foremost among them has been the affirmative vote of June 23 on Brexit: whether the United Kingdom should leave the European Union.
I have no interest in writing a memo about Brexit itself. There’s a huge number of moving parts, too little past experience, too many varying opinions, and zero clarity on how the departure will be handled. There are many pundits out there telling us what the consequences of Brexit will be. The only thing I’m sure of is that most of them are wrong, and if I were to join their ranks, I’d probably be wrong, too.
Economic Reality: Choices and Consequences
The May memo described the ways in which economics defines and constrains reality in business, investing and everyday life. Economics establishes the rules of the game and the boundaries of the playing field, and these things can’t be ignored. They can be altered, but not without consequences.
The realities of economics are stark and consistent, but also logical. They aren’t absolute, like the laws of physics (e.g., gravity), but they reliably establish tendencies and limits. If the price of something goes up, the amount consumed is likely to go down. If wages rise, the number of people employed for a task is likely to decline. If tax rates go up, there’s likely to come a point at which there’s less incentive to work, and thus less output. If a government spends more, to pay the bills it has to either print money (which tends to be inflationary), raise taxes or borrow.
Shortly after publishing “Economic Reality,” I added a new section to the version appearing on Oaktree’s website, saying economics is largely the study of choice. If you only have $10, do you want to buy a $10 book or two $5 hamburgers, or make a $10 gift, or add $10 to your savings? The only thing we know you can’t do is do them all. Further, decisions and actions have consequences. For example, spending can provide us with enjoyment, but it will also make us poorer.
Reality in Politics
I’ve always gotten a kick out of oxymorons – phrases that are internally contradictory – such as “jumbo shrimp” and “common sense.” I’ll add “political reality” to the list. The world of politics has its own, altered reality, in which economic reality often seems not to impinge. No choices need be made: candidates can promise it all. And there are no consequences. If something might have negative consequences in the real world, politicians seem to feel free to ignore them. If someone annoying, like a journalist or an opposing candidate, asks about potential consequences, it’s easy these days to misrepresent them or deny they exist. And if it turns out that costs or consequences were willfully ignored, no redress is available: election victories based on unmet promises can’t be rescinded, and candidates can’t be sued over falsehoods on the stump.
In the addendum to “Economic Reality,” I pointed out that candidates rarely talk about choice. Instead, they’re likely to promise “all of the above.” And rarely if ever do they mention the cost that will be attached to something, or the downside, as in “I’ll give you A, but you’ll have to give up B.” I imagine page one of The Politician’s Handbook must say “never deliver an unpleasant message.”
In “What Worries Me” (August 2008), I wrote:
Imagine two candidates for president. One says, “I’m going to give you eight years of discipline and denial – of higher taxes and lower spending – but I’ll leave the country in better shape.” The other says, “I have a secret plan that will solve all of our problems without requiring any sacrifice on your part.” Who do you think would win?
How about a real-world example? In 1984, Walter Mondale was the Democratic candidate for president, running against Republican incumbent Ronald Reagan. Mondale became famous for his candor in accepting his party’s nomination:
Whoever is inaugurated in January, the American people will have to pay Mr. Reagan’s bills. The budget will be squeezed. Taxes will go up. And anyone who says they won’t is not telling the truth to the American people. . . . Mr. Reagan will raise taxes, and so will I. He won’t tell you. I just did.
The result? Mondale lost in a landslide, with the popular vote of 59% to 41% representing the seventh-biggest percentage deficit in presidential election history. Far worse, of the 538 electoral votes, he won only 13 (the District of Columbia and his home state of Minnesota). That stands as the second-lowest electoral total for a presidential runner-up since 1824. So much for the benefits of candor.
Today many politicians promise to safeguard the Social Security system, but rarely do we hear anyone talk about (a) reduced benefits, (b) higher Social Security tax rates, (c) a higher ceiling on wages taxed, (d) delayed onset of benefits, or (e) means-testing for recipients. And yet, either some combination of these or the insolvency of the system is an actuarial certainty. Instead, we get the candidate’s mantra: more for all, with no cost or consequences . . . and, in the case of Social Security, a complete absence of progress.
Brexit: Political Reality in Action
Being in Europe at the time of the Brexit vote gave me an opportunity to see the imperfections of political reality in action. I’ll review a few:
- The decision to conduct the referendum was a matter of political expediency (defined as “the quality of being convenient and practical despite possibly being improper or immoral”). A schism in the Conservative Party between the pro-Europe faction and the Euro-sceptics (pronounced “skeptics”) – as well as opposition from the UK Independence Party, or UKIP – threatened to hand Britain’s 2015 election to the Labour Party. To put down this threat, Conservative Party leader David Cameron promised in 2013 to put the issue of membership in the European Union to a popular vote. We often see politicians paper over a problem with promises today, preferring to put off the possible consequences until tomorrow (they seem to assume tomorrow will never come – see page 4). This is a very practical stratagem, since elected officials often leave office well before consequences appear, and at any rate, there’s no consolation prize for losing an election, so a candidate might as well do everything he can to win.
- Potential consequences are often overlooked or not understood. Of course, the ramifications of a Brexit referendum couldn’t be known in 2013; even now in 2016 no one knows what they’ll be, although the decision to leave is a fait accompli. It was a glaring error to leave a decision of this importance and permanence up to a simple majority of those going to the polls. The referendum