Howard Marks, the billionaire cofounder of Oaktree Capital Group, isn’t buying the “bring back the jobs” rhetoric being thrown around in the US election season.
In a 13-page memo published this week dubbed “Economic Reality,” the money manager touched on the tax system, minimum wages, and working-class discontent.
One big area Marks focused on was the US election. He highlighted presumptive Republican presidential nominee Donald Trump’s promise to recover US manufacturing jobs from foreign countries and Sen. Bernie Sanders’ argument for developing trade policies more focused on spurring job growth in the US. He thinks the politicians are promising too much.
First, Marks points out that US manufacturing output is near an all-time high, even though US manufacturing employment is down 37% from the peak in 1979. In other words, productivity has increased.
“So while we’ve lost 3.2 million jobs to China since 2001, for example, we’ve lost many times that to improvements in productivity.Perhaps if the government wants to preserve jobs it should just outlaw productivity gains,” he quipped.
He then points out some of the practical difficulties with bringing back the jobs. Consider the following example:
Let’s assume it’s possible to manufacture high-labor-content goods like cellphones much more cheaply in China than in the U.S. (not an unreasonable assumption, since the average manufacturing worker in China makes less than $9,000 per year). And let’s assume the resulting cost to deliver a cellphone to an American retailer is $100 if made in China versus $150 if made in the U.S. In that case, a Trump or Sanders administration would have the following choices:
- forbid imports of cellphones, requiring that they be made in the U.S. at a cost of $150,find Americans willing to work at Chinese wages, bringing the cost down to $100, orimpose a trade tariff on Chinese imports that equalizes the U.S. retailer’s cost for phones at $150.
Marks doesn’t see the first solution as feasible. The second is equally unlikely, he said, citing the tedious nature of the work involved and violation of the US federal minimum wage. That leaves us with tariffs, but Marks notes there are simply too many problems with this option:
- Such tariffs are probably barred under trade agreements that are in place. To impose them, we would have to break those agreements.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? As The New York Times wrote on May 3, “starting a trade war might be cathartic for workers who have lost jobs, but it is unlikely to create a lot of factory work.”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?What would rising trade barriers do to one of the main motivations behind the broadening of U.S. trade agreements since World War II: preventing conflict?Finally, but most simply, what American wants to pay 50% more for a cellphone than they do today?
- Thomson Reuters
According to Robert Scott of the Economic Policy Institute, 3.2 million American workers have lost their jobs -including 2.4 million manufacturing jobs – to low-cost goods importers from abroad. And politicians are eager to use this issue to strike a chord with struggling Americans, especially when the pace of hiring is slowing and concerns over recession indicators is growing.
Trump has pledged to end “China’s illegal export subsidies and lax labor and environmental standards” and eliminate sweatshops or “pollution havens stealing jobs from American workers.”
As we’ve previously explained, however, his plan to relocate Apple’s production back to the US is not viable. Economists are also not convinced by Sanders’ economic plans, citing a lack of “credible economic research” to support the Democratic candidate’s estimates.
This brings us back to Marks’ main point: that “economic common sense” isn’t so common. He doubted voters had really thought through how a “bring back the jobs” policy would affect their cost of living, and he emphasized that it was impossible to have best of both worlds:
Do we want to subsidize our farmers, or do we want to allow Americans to buy cheap crops from abroad (and let the farmers go out of business)? Leaving aside strategic national considerations, do we want to protect the jobs of those who work in industries where the U.S. is uncompetitive, or do we want to allow U.S. consumers as a whole to minimize their cost of living?In each case, it’s one or the other … but not both.
Bottom line is: don’t ignore economic laws or expect magical solutions to appear.Read the full memo at Oaktree’s site»