I wrote this to summarize my thoughts from a chat session that I was able to participate in at Thompson Reuters Global Markets Forum yesterday. It was wider ranging than this, but was a very enjoyable time. Thanks to Manoj Rawal for inviting me.
On the Pursuit of Economic Growth
I think one of the conceits of the modern era is the degree of trust we place in governments. We want them to do everything for us. The truth is that their power is limited. Even if we delegate more power to them, that doesn’t mean the power can/will be used by the government for the purposes intended.
The government is composed of people with their own goals. It’s not much different than shareholders delegating power of the corporation to a board of directors, who collectively oversee management, should they care to do so. Often delegated power gets misdirected for the ends of the power- and money-hungry.
Who watches the watchers? It is one reason why we have “rule of law” in many republics – there is law that governs the government, if we have the will to maintain that. It differs from “rule by law” which exists more commonly on Earth – laws exist so that the rulers can maintain their rule over those they rule – of which China is an excellent example. Freedom that is good for the interests of the Communist Party is allowed to exist, but not other freedoms. There are no rights that are God-given, not subject to the dictates of governments.
Sorry for the digression – my main point is that even the most powerful governments get bogged down, and can’t do nearly what people imagine they can do. It is akin to what Peter Drucker said on management, that where managers proliferate, it takes progressive more people to manage all of the people – you might actually be able to get more done with fewer people.
Governments face another constraint – because people think the government can stimulate the economy, we have had governments stretch past their budgetary limits, borrow a lot of money, and make long-dated promises that they can’t keep. This is not just a US phenomenon. This is happening globally. It is rare, possibly even non-existent to find countries that run balanced budgets, have sound monetary policy, and haven’t overpromised on entitlements.
As such, there isn’t that much that governments can do in terms of discretionary spending. Even when they do allocate money, most projects of any significance don’t produce immediate results, but take years to start and more years to complete. China may be able to run roughshod over its citizens, but where rule of law exists, there is necessary delay for most projects. Obama or Trump can long for “shovel ready” projects. They don’t exist, at least not many of them exist that are sizable.
As such, when I look at the plans of Donald Trump, I don’t give them a lot of weight in investment decisions that I make. The same goes for any US or foreign leader, central banker, or whatever. Short of starting a war, the amount of truly impactful things he can do is limited, especially for overly indebted governments.
What does matter then? I think culture matters a lot. Here are some questions to think about:
- What priority do we place on taking risk?
- How do you balance the competing needs of creditors and debtors?
- How easy is it to start a business?
- How do we feel about people using natural resources for profit?
- How predictable is government policy, so that people can make long-term plans, and not worry about whether they will be able to see those plans to their fruition or not?
- Does the culture protect private property?
- Do we encourage men and women to marry, start families, and raise intelligent children?
- Do we encourage charitable endeavors, so that effective help can be given to those who genuinely want to escape poverty? (rather than perpetuate it through continual handouts?)
- How much do we play favorites across and within industries?
- To what degree do we force uneconomic growth objectives through tax incentives, such as owning a home, rather than renting?
- How much are we willing to allow technology to eliminate jobs, such that labor is directed away from simple tasks to tasks of higher complexity?
It is my opinion that those are the greater drivers of economic growth, and that the government can do little to foster growth, aside from having simple long-term policies, and letting us get on with being productive.
As such, I don’t see a lot going on right now that should promote higher growth. Note that high growth is not necessary for a strong stock market, but it is necessary if you want to see ordinary laborers benefit in society.