People have continued to ask me how the explosion in deficit spending in Washington will ultimately impact the US economy. It is a great question, one which is on a lot of peoples’ minds, and for good reason. Intuitively, for a lot of people, ‘we’ can’t continue to keep piling on the debt without there being some drastic day of reckoning in the future. After all, the country has to somehow figure out a way to pay it all back, right? Maybe.
Underlying this thought process is the idea debt is a bad thing, something to be avoided. To be sure, loading up the liabilities on your balance sheet can have disastrous effect, ruinous even. However, that doesn’t have to be the case. After all, if you can borrow $1 and turn it into $2, that isn’t so bad, is it? Assuming the interest rate is less than 100%, of course. However, if you borrow $1 and turn it into 0%, well, that isn’t so good.
For instance, imagine you take out a $25,000 HELOC to construct a modest sunroom on the back of your house. Your realtor thinks it will add roughly $30,000 to the market value of your home. So, is that a good use of leverage? Basic accounting would suggest it is. After all, assets minus liabilities equals equity, and your use of debt increased your net worth by $5,000. Good for you.
Now, what if you take out that same $25,000 HELOC, and use it to throw a massive birthday party for yourself? Would that be a wise thing to do, economically speaking? Clearly, the answer is no, because you don’t get anything on the asset side of your balance sheet for the $25,000 you borrowed. As a result, your equity goes down by that amount. While the bash might have been a heckuva good time, you figuratively (and perhaps literally) ate your money.
Admittedly, Washington doesn’t have a very good track record when it comes to financial stewardship, as our debt has mushroomed in both absolute and relative (compared to the size of the economy) terms. Basically, it has used debt unwisely, as the economic activity generated has been less than the amount borrowed. I hope that makes sense. Even so, it is too early to tell IF the recent profligacy has been a good or bad use of leverage…but, I am not holding my breath.
In essence, the problem with debt isn’t the debt itself. It is what we do with it that matters. Are we going to invest it wisely or are we going to eat it? We shall see.
Regardless, I often use the following analogy when discussing our nation’s indebtedness. It might be a little simplistic, but it works for me.
Imagine I challenge Usain Bolt, the fastest sprinter in history, to a 100-meter footrace. What are the chances I would win? Let’s just say Vegas wouldn’t even bother making a book on it. He would win by 40-meters, at a minimum. Now, imagine we handicap Bolt a little, and put 10-lb. ankle weights on him. Who wins now? Bolt would still win, but the margin of victory would undoubtedly narrow. Fair enough. What if we force him to wear 20-lb. weights? How about then? I imagine the bookies might actually start taking some bets in that scenario, even if I would still be a 100-1 underdog.
In this little story, the weights are analogous to our debt load. They don’t keep Bolt from running, and even running faster than the average man (yours truly). However, the greater the ankle weights the slower he will run, and so it is with our indebtedness. It will slow economic activity, as opposed to thwarting it. We are nowhere near a level which would render the US economy, shall I say, motionless. Believe it or not, it currently isn’t even close, even if we ARE getting closer with each massive spending package.
Of far greater concern to me, rather than the deficit spending, is the erosion of the rule of law in the country. To be sure, I sound like a broken record on the subject. However, the rule of law is THE single biggest factor in determining societal and economic success.
Interestingly, it doesn’t matter what the law might be, only that it is knowable, transparent, and evenly enforced. After all, you can’t chew bubblegum in Singapore, but that hasn’t stopped that country’s success, has it?
Consider this. Last Saturday, CNN reported Baltimore City State’s Attorney Marilyn Mosby would no longer prosecute the following crimes: drug and drug paraphernalia, prostitution, trespassing, minor traffic offenses, open container violations, urinating in public, and even defecating in public. Intuitively, that should crush any remaining tourism down at the Inner Harbor. Outrageously, the Mayor of Baltimore, Brandon Scott, and Baltimore City Police Commissioner, Michael Harrison, supported her decision to not enforce the law as it is written. However, Mosby isn’t an exception, as ‘progressive’ district attorneys across the country in cities like Chicago, San Francisco, Los Angeles, Austin, Portland, and others have stopped prosecuting many so-called lesser offenses and misdemeanors.
Soon after he was sworn into office, Los Angeles County District Attorney George Gascon made waves by introducing major changes in how the DA’s office operates out there. ABC7.com staff wrote the following on December 10, 2020:
“The Los Angeles County District Attorney’s Office will no longer prosecute a range of misdemeanor crimes, from resisting arrest to drug possession to making criminal threats, according to a memo issued this week by new DA George Gascon.
Gascon announced a sweeping range of reforms when he was sworn-in Monday, including no longer seeking the death penalty and not using gang enhancements for sentencing.
In addition, he has issued a memo to prosecutors in his office seeking to change how they deal with a range of low-level crimes.
The memo spells out misdemeanors which should be declined or dismissed before arraignment, with a number of exceptions at the discretion of the prosecutor. Among them: Trespassing, disturbing the peace, driving with no license or a suspended license, making criminal threats, drug possession, drinking in public, loitering to commit prostitution and resisting arrest, among others.”
If that weren’t surprising enough, Gwynne Hogan, of WNYC, recently wrote a column for the gothanist.com entitled “What Will Manhattan’s Next District Attorney Refuse to Prosecute?” Here are some of the better parts:
“Midway through a candidate forum Thursday night hosted by Amplify Her, contenders were asked, “As District Attorney, are there offenses you will decline to prosecute?”
It’s hard to imagine this question being thrown at candidates for one of the top prosecutor’s seats in the nation just a few years ago. But with progressive prosecutors running for office (and winning) in cities across the country, the crowded race for Manhattan DA is increasingly defined by what the candidates say they won’t prosecute, rather than what they will.
A spokesperson for Vance’s office said they’re prosecuting 58% fewer cases than a decade ago because they regularly decline most prosecutions of marijuana smoking and possession, subway fare evasion, unlicensed vending, nonpayment of fines and loitering for prostitution.
Progressive prosecutors have run and won in cities across the country in recent years. In 2018, Rachel Rollins was elected as District Attorney for Boston and the surrounding county on a campaign of declining to prosecute certain low-level cases, and faced fierce political backlash from police groups and unions, though ultimately their legal challenges of her policies proved unsuccessful.
Five of eight candidates for the Manhattan post say they would explicitly decline to prosecute all cases related to prostitution charges (Lucy Lang, Elizabeth Crotty and Tali Farhadian Weinstein would not commit to this, according to Color of Change’s candidate questionnaire.).
Tahanie Aboushi, a civil rights attorney, has a list of more than two dozen charges that will be dismissed if they’re the top charge on an arrest record. Assemblymember Dan Quart lists 18 crimes he won’t prosecute which includes trespassing, disorderly conduct, possession of alcohol by a minor.
Alvin Bragg, who previously worked in the New York State Attorney General’s office, lists trespassing, larceny under $250, minor driving offenses, disorderly conduct, drug possession and prostitution. Former prosecutor, Diana Florence’s list is shorter and mentions social distancing violations, sex work-related crimes, loitering, and theft of services.”
So, if the authorities decriminalize a law and choose not to prosecute or otherwise enforce it, is it still a law? That is a great question, as is the following: what good is the ‘rule of law’ when the authorities either don’t enforce it or selectively do so? I would submit it is worthless.
Unfortunately, this seems to be something of a growing trend throughout the country, district attorney’s offices deliberately failing to enforce duly enacted laws and even failing to respect individual property rights by refusing to prosecute shoplifting charges below a set monetary value and even trespassing. Get a load of this from Contra Costa, California: “Cases would not be filed against individuals who are first-time offenders or are facing a standalone charge. Becton said the policy would not apply if the person has been arrested on three previous occasions, the theft is more than $300 in value or the person is on probation. Aside from drug possession offenses, other misdemeanor crimes falling under the new considerations include shoplifting, petty theft, possession of burglary tools, disturbing the peace, disorderly conduct, and trespassing.”
So, the DA’s office in this city won’t prosecute trespassing, as well as theft/shoplifting less than $300 in value? So, why would anyone operate a store in this place? Knowing the authorities aren’t going to prosecute shoplifters? Heck, why would police officers risk injury by arresting shoplifters and/or muggers if they don’t believe the district attorney is going to lock the perpetrators up? Great questions. Perhaps to that end, 10 Walgreens have closed in San Francisco over the last two years, with crime being the cited reason. Even the left-leaning ‘San Francisco Chronicle’ reported at least one Walgreens location was losing an average of $1,000 a day in merchandise because of ‘nonviolent misdemeanor’ shoplifting.
So, no rule of law and weakened individual property rights in these areas? Gang, I gotta tell you, that isn’t good for future economic growth, particularly since it is happening in some of our most economically important cities. It WILL stifle investment and entrepreneurialism, and that is not the American Way.
Let me close today by saying a society is only as strong as its adherence to the rule of law, and that is only as good as the willingness to enforce it. Further, strong individual property rights are just that, and placing an arbitrary market value on them only serves to weaken society. Without these things firmly entrenched, an economy should carry no hope for meaningful future growth.
By comparison, debt is only a minor load.
Take care, have a great weekend, and be sure to tune into our podcast “Trading Perspectives.”
John Norris
Chief Economist
As always, nothing in this newsletter should be considered or otherwise construed as an offer to buy or sell investment services or securities of any type. Any individual action you might take from reading this newsletter is at your own risk. My opinion, as those of our investment committee, are subject to change without notice. Finally, the opinions expressed herein are not necessarily those of the reset of the associates and/or shareholders of Oakworth Capital Bank or the official position of the company itself.