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.
In the 13-page memo dubbed “Economic Reality,” the money manager touched on the tax system, minimum wages, and working class discontent.
One big area Marks focused on is the US election. He highlighted presumptive Republican nominee Donald Trump’s promise to recover US manufacturing jobs from foreign countries, and Sen. Bernie Sanders’s argument for developing trade policies more focused on spurring jobs in the US. He thinks the politicians are promising too much.
Consider the following example:
Let’s assume it’s possible to manufacture high-labour-content goods like mobile phones 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 mobile phone 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 mobile phones, 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, or
- impose 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 mobile phone than they do today?
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 labour and environmental standards,” and eliminate sweatshops or “pollution havens stealing jobs from American workers.”
However, as we’ve previously explained, his plan to relocate Apple’s production back to the U.S. 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 have really thought through how a “bring back the jobs” policy would impact their cost of living, and emphasised that it’s impossible to have best of both worlds:
Do we want to subsidise 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 minimise 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.
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