Memo to: From: Re:
Oaktree Clients
Howard Marks
Political Reality Meets Economic Reality
One of the big trends in politics in recent years has been the rise of populism. While populism is somewhat amorphous, here’s a definition for the purposes of this memo:
)
A political philosophy supporting the rights and power of the people in their struggle
against the privileged elite. (The Free Dictionary
I think it’s important to add another word with regard to the adoption of populism as a political strategy: it plays on resentment on the part of “the people” toward “the elite.”
Populism has been on the rise in Europe for a number of years, generally associated with the political right and characterized by resentment toward economic, liberal and urban elites. It has often been accompanied by authoritarianism, allowing charismatic strongmen to present themselves as protecting“the people” from looming threats like immigration.
A good part of the credit for Donald Trump’s election in 2016 has likewise been attributed to populism. This instance, also coming from the right, was largely built on resentment from rural, white, older and less-educated voters directed at urban, establishment, educated and cultural elites, as well as unhappiness with social and demographic trends that are disrupting the status quo.
But as shown in the 2016 presidential Democratic primary contests and since, another wave of populism has arisen from the left. I’m most concerned that in this case, the principal targets of popular resentment are capitalism and capitalists.
One of the big stories of the 2016 primary season was the success of avowed Democratic Socialist Senator Bernie Sanders. Sanders launched a challenge to Hillary Clinton, the heir-apparent to the leadership of the Democratic Party and eventually the chosen nominee. He gained a lot of followers and gave Clinton a run for her money, in particular by emphasizing economic justice, the corrosive effect of money (and especially corporate money) in politics, and the promise of healthcare and education for all.
Following on Sanders’s performance, the so-called “progressive” or left wing of the Democratic Party is becoming a formidable bloc. I expect progressives to be a force to be reckoned with in the coming years. They will show up strongly in the 2020 primaries and influence the debate. In fact, their influence is already being seen. And thus this section of my memo.
In a possibly isolated but telling incident, in a Democratic congressional primary last year in Queens, New York, Alexandria Ocasio-Cortez came from the far left to beat Joe Crowley, a ten-term, center/left congressman. Crowley was #4 in the Democratic leadership in the House of Representatives and considered a likely eventual successor to Nancy Pelosi as House Speaker. Instead he was ousted by Ocasio-Cortez: 28 years old at the time and sporting a storybook bio featuring a working-class upbringing, academic distinction and stints as a bartender and waitress. She had been politically oriented but had never held elected office. And yet she became the youngest woman ever elected to Congress. She’s been very outspoken since and has attracted disproportionate attention for a freshman legislator.
Ocasio-Cortez, like Sanders, is a member of the Democratic Socialists of America, and she willingly accepts the label “radical.” A New Yorker article titled “Left Wing of the Possible” quotes her as follows:
I do think we are in a crisis of late-stage capitalism, where people are working sixty,eighty hours a week and they can’t feed their families. There is a lot that is economically dystopic in this country. So that’s why people are open to change. (July 23, 2018)
Julia Salazar, another member of the D.S.A., also ousted a Democratic incumbent last year and won election to the New York State Senate with the “ardent support of Ocasio-Cortez.” The same article included a statement from her that I found chilling:
. . . a democratic socialist “recognizes the capitalist system as being inherentlyoppressive, and is actively working to dismantle it and to empower the working class andthe marginalized in our society.”
Does this group genuinely want to abolish capitalism? Thankfully, the same article went on to reflect some moderate sentiment:
Michael Kazin, a co-editor of Dissent and a D.S.A. member, [said]: “The radical left’smajor influence in American history is to push liberals, progressives, to the left. And thatis going to be the impact. I don’t believe we are going to have a socialist transformationof America in my lifetime.”
In July, The New York Times explored the Democratic Socialists’ agenda as follows:
“So what are we talking about here?” the host Stephanie Ruhle asked in an MSNBC segment, with background graphics highlighting that democratic socialism is “NOT Socialism” and “NOT Communism” but something more like a fondness for SocialSecurity and Amtrak. The D.S.A. itself both embraces and rejects such friendlydefinitions, explaining that it “fights for reforms today” but still seeks to overturn “an international economic order sustained by private profit, alienated labor” and other formsof exploitation. . . .
When today’s leftists talk about socialism, they point to places like Sweden and France(home to robust maternity leave and universal health care) or even to lost relics ofAmerica’s recent past (stable jobs, union power, a collective investment in human welfare). (July 22, 2018)
Ocasio-Cortez and Salazar may not be indicative of a broad movement, as they hail from New York City, where a Democratic candidate is a sure thing in a general election and extremism is unlikely to be an impediment. But some trends among our citizens are very much worth noting. According to the New Yorker article cited above:
In 2016, the Institute of Politics, at Harvard’s Kennedy School, polled people between theages of eighteen and twenty-nine, and discovered that support for capitalism was surprisingly low. Fifty-one percent of the cohort rejected capitalism; thirty-three percent supported socialism. A later edition of the survey found that fifty-one percent were“fearful about the future,” while only twenty percent were hopeful. . . .
Seventy-eight percent of Americans working full time live paycheck to paycheck; nearly half do not have four hundred dollars at the ready. . . .
. . .while ninety percent of people born in the nineteen-forties outearned their parents –the traditional American expectation – this number has fallen to fifty percent for people born in the nineteen-eighties. [Of course, they could be too young to have done so yet.]
These are the dystopic trends Ocasio-Cortez cites and the source of the resentment of capitalism that givesrise to today’s populism from the left.
As I see it, for the 60 years immediately following World War II, much of the world enjoyed a rising tide of prosperity that lifted all boats. That made nearly everyone economically content and thus happy with capitalism and free-market solutions. Even though some people did better than others, most did quite well. Living standards rose and the incidence of poverty declined. Ronald Reagan and Margaret Thatcher celebrated the efficacy of free markets, and the world agreed.
Now the rate of economic progress has receded and current trends are less cheering:
The possibility that economic growth will be slower than that of the post-war period
The negative impact of globalism and automation on specific groups
The increased importance of advanced education or the ownership of capital
As a consequence of numbers 2 and 3 above, increased income inequality
In short, the tide is no longer rising to the same extent, and many fewer people are happy with their circumstances and outlook. Their unhappiness crystalizes in populism. And it needs a target. Why not capitalism?
My point here is that, as I said above, I expect the rising influence of the left to impact the 2020 election cycle. Left-wing Democratic candidates will present challenges to moderates in their party, and the latterwill have to tailor their messages to compete. And it’s starting. In particular, I cite two pieces of proposed legislation that emerged recently from prominent Democrats:
? Senator Elizabeth Warren, already an announced 2020 presidential candidate, has introduced her Accountable Capitalism Act. Two of its provisions caught my attention:
. . . incorporation for large companies would become a federal matter, . . . These federally chartered companies would be mandated to consider the interests of a list of stakeholders, from investors to employees to customers and communities. These groups could then sue if they deemed the company had breached their duties. . . .
. . . Senator Warren’s legislation calls for 40 percent of directors to be elected by employees. (The Financial Times, September 24, 2018)
? Senator Cory Booker of New Jersey, often mentioned as a presidential hopeful, has introduced legislation that I view as related:
The Worker Dividend Act would mandate that companies buying their own shares must also pay out to their own employees a sum equal to the lesser of either the total value of the buyback or 50 percent of all profits beyond $250 million. (Vox, January 10, 2019)
I absolutely am not writing to defend stock buybacks or criticize labor representation on boards. What I oppose is (a) the idea of governments deciding how companies will be run and (b) theappropriation of corporations’ economics for parties other than their owners.
What would be the effects of turning over some of businesses’ capital to workers, or requiring that they be put on corporate boards? Clearly, to do the former would be comparable to saying to shareholders,“That thing you thought you owned – the company – you don’t really own that.” Stock buybacks are away of returning capital to companies’ owners. Why should each one be accompanied by giving an equivalent amount to workers? Wouldn’t the next step be to say, “Whenever a company pays a dividend, it has to distribute an equal amount to its workers”? And wouldn’t that be tantamount to saying, “Asfor corporate capital, the workers own half”? Consequences? Ask yourself who would start a corporation in the future if it meant the workers would be entitled to half the gains.
What about requiring that workers be put on boards? To date, it has been the job of a corporation’sdirectors to represent its shareholders. Requiring that 40% of them be workers would be, in essence, another way of saying the shareholders aren’t in full control. If workers were put on boards, whose interests would they represent: the corporation and its shareholders, or labor? To whom would they work to deliver benefits? If an opportunity arose to increase efficiency and profitability by investing in automation, for example, how would labor’s directors be expected to vote?
And that leads to the matter of requiring corporations to serve multiple interests. Today, directors are legally deemed to have done their jobs if they applied “business judgment” for the benefit of the company(and thus its shareholders). How would they be expected to simultaneously work for the good of the company and its owners as well as its workers, customers and communities? Can you imagine the lawsuits that would fly over the issue of whether too much had gone to one group rather than another? How could a court decide whether the multiple constituencies had benefitted in the appropriate proportions?
What I’d like to do is get some of the progressive politicians and the less-capitalist young people in a room and ask them a simple question: To what do you attribute America’s preeminence in the worldover the last hundred years and the generally superior living standards of its people? In short, what has been behind the United States’ progress to the top of the heap?
What’s absolutely clear to me is what it’s not: that we’re superior people, smarter, better, morevirtuous or more deserving. Instead, I think it’s our democracy, our freedoms, and our less rigid social and financial structures. But, extremely importantly, I also think there have been enormous contributions from capitalism/free enterprise, the free-market system, economic incentives, private ownership of property, individual economic opportunity, and the very limited involvement of government in the economy.
Capitalism is an imperfect economic system, because differential performance in the pursuit of economic success – as well as luck – results in there being (a) some people who are less successful as well as some who are more and (b) a few who are glaringly successful. Obviously I’m someone who has profited from capitalism, so my views could be dismissed as hopelessly biased. However, I’m 100% convinced that the capitalist system has produced the most aggregate gains for our society, exceptional overall progress, and a better life for most. For me, the best assessment of capitalism is the one Winston Churchill applied to democracy:
No one pretends that democracy is perfect or all-wise. Indeed, it has been said that
democracy is the worst form of Government except all those other forms that have been
tried from time to time.
In the same way, I’m convinced that capitalism is the worst economic system . . . except for all the rest. No other economy has accomplished what the U.S. has, accompanied by extensive personal freedom, and especially not the ones centrally controlled by government. In particular, no other economy has produced inventions and innovations – and distributed life-enhancing products – like the U.S. has.
I’m not arguing in favor of unfettered behavior on the part of corporations. They can’t be allowed to use just any tactics to get ahead. They mustn’t be permitted to compete unfairly against each other,behave in anti-social ways, or do damage in pursuit of profit. Thus laws, regulations and active supervision on the part of diligent directors are needed to police corporate behavior. I also think the leaders of society should encourage companies to operate with a conscience and voluntarily work for the betterment of their communities. But this must be done within the framework of the elements that made America great – not by subverting them.
Also, I feel it’s essential that governments create effective safety nets to assist the less-fortunate members of society who end up at the bottom of the income distribution. Capitalism can make countries successful through the operation of economic incentives and healthy competition, but I’mnot in favor of unmitigated “dog eat dog” or “survival of the fittest.”
Progressives and Democratic Socialists promise increased equality of income and improvement for people below the top. These are worthy goals, and I support them. But trying to achieve them by dismantling capitalism would be worse for just about everyone. There is no proof that restrictions on capitalism and government involvement in economies can promote equality other than by shrinking the pie. Consider what it would be like if the U.S. didn’t have the sanctity of private ownership, the efficiency of privately run business, and the incentive of personal economic advancement. The hard- left thinks government can do things better than free markets and increase wellbeing. Which government agencies would you like to see managing our economic engine?
A lot of the left’s economic approach is based on closing the income gap, not just by making things better for people at the bottom, but also by pulling down people at the top.
? Thus on the TV show 60 Minutes, Ocasio-Cortez expressed fondness for a top federal income tax rate of up to 70% on incomes over $10 million. Combined with the top New York State and City rates, for example, that would give government 83% of the marginal income of people in the top bracket. (That’s not terribly far from the suggestion from Jean-Luc Mélenchon, the CommunistParty’s candidate for president of France in 2017, of a 100% tax rate on incomes above €400,000,or 20 times France’s average wage.)
? Not dissimilarly, in November members of the House considered adjusting its rules to require a 60% super-majority to increase income taxes on the bottom 80% of Americans, but only a simple majority to raise taxes on the top 20%. Is it fair for government to employ different sets of rules when deciding how different groups will be taxed?
? On January 24, just under the wire for inclusion in this memo, Elizabeth Warren took the issue of differential taxation to its ultimate extreme: a wealth tax. I’ll let her words on Twitter speak for themselves:
The rich & powerful run Washington. Here’s one benefit they wrote for themselves:
After making a killing from the economy they’ve rigged, they don’t pay taxes on that accumulated wealth. It’s a system that’s rigged for the top if I ever saw one.
We need structural change. That’s why I’m proposing something brand new – an
annual tax on the wealth of the richest Americans. I’m calling it the “Ultra-
Millionaire Tax” & it applies to that tippy top 0.1% – those with a net worth of over
$50M.
Any populist appeal to resentment there?
And what exactly is the benefit that the “rich & powerful . . . wrote for themselves”? That they get to keep what they earn net of taxes. Senator Warren omits to mention that under the American system, nobody pays tax on accumulated wealth. But she sure makes it sound egregious that the rich don’t do so. The rich didn’t arrange an exemption for themselves; there is no wealth tax. But why let facts like those get in the way of political rhetoric?
Over the centuries, one thing that has brought successful democracies to an end has been the realization on the part of the majority that they can appropriate more for themselves by taxing those at the top. This is an example of the so-called “tyranny of the majority.” As The New York Timessaid the other day, albeit in direct reference to Brexit:
During debates over the American Constitution, James Madison warned in one of the essays that became the Federalist Papers that unbridled majoritarianism had made earlierdemocracies “as short in their lives as they have been violent in their deaths.” Only “a republic” of representatives subject to rules and institutions as well as the public, he wrote, “promises the cure for which we are seeking.”
. . . as Mr. Madison warned in the Federalist Papers, a democracy imposed “by the superior force” of an “overbearing majority” may not always remain democratic.(January 22, 2019)
Does the left understand the long-term consequences of the majority imposing confiscatory taxes on the rich, and do they really want them? Will reducing the incentive to earn more (or incentivizing successful Americans to transfer their citizenship to other nations) really result in the betterment of most people?Americans generally accept the concept of progressive tax rates. But they must not be punitive and de-motivating. Note in this regard that in 2015, the top 5% of taxpayers (with 37% of all income) paid 60% of all income taxes, and the top 1% (with 21% of income) paid 39%. To the political left: are those proportions of taxes paid “fair”? And would it still be fair if they were much higher?
(I want to make clear that I believe room does exist for increases in tax rates on the biggest earners since(a) today’s top rate of 37% is one of the lowest in the 106-year history of the U.S. income tax and (b) dividends and capital gains are taxed at rates that are far lower still. It could be argued that all forms of income should be taxed the same.)
While there are ways in which the system can be improved, I consider it problematic when people denounce capitalism without acknowledging its benefits. It’s ironic to think of politicians criticizing the
capitalist system via platforms like Twitter and Facebook (accessed on their iPhones); at rallies reached via airlines and cars (perhaps employing ride-sharing services such as Uber); in meetings over a Starbucks coffee; and via cable news networks. All of these are innovations that came out of a system that encourages people to take significant risks to start companies on the premise that they’ll reap the rewards of ownership if their businesses succeed.
I'm sure if they thought about it, the list of innovations these people wouldn’t want to live without –ranging from drugs to consumer products, to services, to technology – would be a long one. Which of those would we have today if not for the profit motive and the possibility of ending up with accumulated wealth? And in the absence of those expectations, to whom would we look for the innovations of the future? How’s the record of non-capitalist countries such as the U.S.S.R., Cuba and Venezuela in this regard?
A great deal of America’s economic progress has resulted from people’s aspiration to make more and live better. Take that away and what do we have? The people at the bottom won’t have as many at the top to resent. But without the contributions of those who aim for the top, everyone will have less to enjoy (see the appendix for an informative parable). This is why I worry about the rise of negative sentiment toward capitalism and antipathy toward those who succeed under it.
Appendix: The Tax System Explained in Beer
Suppose that every day, ten men go out for beer, and the bill for all ten comes to $100. If they paid their bill the way we pay our taxes (by taxpayer decile), it would go something like this:
The first four men (the poorest) would pay nothing. The fifth would pay $1.
The sixth would pay $3.
The seventh would pay $7.
The eighth would pay $12.
The ninth would pay $18.
The tenth man (the richest) would pay $59.
So, that’s what they decided to do.
The ten men drank in the bar every day and seemed quite happy with the arrangement, until one day, the owner threw them a curve ball. “Since you’re all such good customers,” he said, “I’m going to reduce thecost of your daily beer by $20.” Drinks for the ten men would now cost just $80.
The group still wanted to pay their bill the way we pay our taxes. So the first four men were unaffected. They would still drink for free. But what about the other six? How could they divide up the $20 windfall so that everyone would get his fair share?
The bar owner suggested that it would be fair to reduce each man’s bill by a higher percentage the poorer he was, to follow the principle of the tax system they had been using, and he proceeded to suggest the new lower amounts each should now pay.
And so the fifth man, like the first four, now paid nothing (a 100% saving). The sixth now paid $2 instead of $3 (a 33% saving).
The seventh now paid $5 instead of $7 (a 29% saving).
The eighth now paid $9 instead of $12 (a 25% saving).
The ninth now paid $14 instead of $18 (a 22% saving). The tenth now paid $50 instead of $59 (a 15% saving).
The first four continued to drink for free, and the latter six were all better off than before. But, once outside the bar, the men began to compare their savings.
“I only got a dollar out of the $20 saving,” declared the fifth man. He pointed to the tenth man, “But hegot $9!”
“Yeah, that’s right,” exclaimed the sixth man. “I only saved a dollar, too. It’s unfair that he saved ninetimes more than me!”
“That’s true!” shouted the seventh man. “Why should he get $9 back, when I got only $2? The wealthyget all the breaks!”
“Wait a minute,” yelled the first four men in unison, “we didn’t get anything at all. This new tax system
exploits the poor!”
The nine men surrounded the tenth and beat him up.
The next day, the tenth man didn’t show up, so the other nine sat down and had their beers without him. But when it came time to pay the bill, they discovered something important: They didn’t have enoughmoney between all of them for even half of the bill!
And that is how our tax system works. The people who already pay the highest taxes will naturally get the most benefit from a tax reduction. Tax them too much, attack them for being wealthy, and they just may not show up anymore. In fact, they might start drinking overseas, where the atmosphere is friendlier. |
