This week, I made a presentation with my friend Anoop Mishra, the regional executive of the Birmingham branch of the Federal Reserve. Miller Girvin at the EDPA had asked us to speak for 20-25 minutes about the health of the US economy and then leave some time for questions. Anoop and I would probably still be fielding questions if she hadn’t cut off the Q&A.
Let’s just say folks were engaged and inquisitive.
One of the questions was about potential threats to future economic growth. I secretly suspect people ask this type of question to get overt political commentary. Perhaps I am a bit paranoid, but everyone talks about me behind my back anyhow.
Anoop went first, and hit a double into the gap with his answer. Solid stuff about monetary policy and workforce trends which cleared the bases. I was hopeful he would do just that, as I wanted be more philosophical with my response.
Folks were probably a little confused when I started with: “years ago, there was a comic strip called Pogo.” If you remember it, you might also remember Pogo’s famous quote: “we have met the enemy and he is us.” While cartoonist Walt Kelly was promoting environmental awareness, this quote is true for most things.
We are our own worst enemy. It isn’t Russia or China. It isn’t the Europeans or Ziggy Stardust & the Spiders from Mars.
As I have written here in the past, all successful economies and societies have three common characteristics. To be sure, there might be more. However, the three which I have noticed across ethnic, linguistic, and religious lines are the following. First, adherence to the rule of law. Second, strong individual property rights. Third, the effective development of human capital.
If a locality jealously guards these three things, it will have a significant chance for meaningful success. Period. End of discussion. Done and dusted.
As for the rule of law, it doesn’t really matter what the law is. It is more important it is transparent, knowable to all, not subject to capricious change, and evenly enforced. Think about it. It is illegal to chew gum in Singapore. How does that makes sense in the 21st century? However, according to The Heritage Foundation’s 2022 Index of Economic Freedom, Singapore is the freest, most open economy in the world.
By comparison, the United States ranks 25th. This is behind countries like Estonia, Chile, Czech Republic, Lithuania, and Cyprus. That’s right. So much for land of the free and all of that. Well, that might be a bit of a stretch. The US is still pretty high on the list, and this isn’t meant to be a comparison.
Having strong individual property rights might not sound terribly insightful. However, it is more of a rarity than you might think. In many places, property rights simply don’t exist either in theory or in practice. Further, this doesn’t just mean a government’s impulsive expropriation of assets or the nationalization of industries. No.
Price and rent controls are violations of property rights. So are zoning restrictions, particularly when they are political in nature. Overregulation is also a severe encumbrance. In essence, any policy, ordinance, law or regulation which restricts an owner’s full enjoyment of their assets is anathema to economic growth.
To be certain, the ‘enjoyment’ of your asset can’t infringe upon my ‘enjoyment’ of mine, including but not limited to the market value. However, that is perhaps a topic for a different discussion.
Finally, the development of human capital is imperative for economic success. By this, I mean the effective education and training of the workforce to meet the needs of the local economy. For instance, it wouldn’t make much sense to train Manhattanites in, say, digging coal. Likewise, it would be a waste of effort to teach people how to raise pigs in Saudi Arabia.
With that being said, and all other things being equal, more education is better than less. Throughout the world, there is a strong positive correlation between education and worker productivity. Intuitively, this makes sense. Unfortunately, there are no shortage of places which intentionally under-educate their citizens. This is usually for one or two reasons: 1) to maintain political power, and: 2) to keep unskilled workers’ wages low to appease the local controllers of production.
It happens in this country today, both the aforementioned intentional as well as the unintentional. Let me focus on the last one.
Currently, there is a shortage of skilled craftsmen in the country. Contractors and builders have to pay huge sums of money to get qualified welders, masons, etc. to show up to the job site. Such is the demand for these workers. However, what are local boards of education doing to address this? In many school districts, this sort of training would be a virtuous expenditure of money.
Also, it seems the goal for many K-12 programs is to prepare children for future education, not the local economy. Even then, most students aren’t truly prepared for college. Finally, in this country, test results can vary wildly by zip code, let alone state or region. Still, after looking at PISA data, the United States doesn’t alone in this regard.
So, what can we do to ensure those three things happen? If only we can waive a magic wand and make it so! Is there one? Unfortunately, no.
The best we can do is limit the size and power of our governments and increase the amount of money we spend on training our kids. Training them for the economy that is, and not the one that once was.
I said an abbreviated version of that yesterday down at the EDPA. I will say it again next year if they have me again. In fact, I will say it as often as I can to as many people as I can until I can’t do it any longer. To counter Pogo, the enemy doesn’t have to be us.
Thank you for your continued support. As always, I hope this newsletter finds you and your family well. May your blessings outweigh your sorrows not only on this day but every day. Also, please be sure to tune into our podcast, Trading Perspectives, which is available on every platform.
Please note, 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 actions you might take from reading this newsletter is at your own risk. My opinion, as those of our investment committee Investment Committee, is subject to change without notice. Finally, the opinions expressed herein are not necessarily those of the rest of the associates and/or shareholders of Oakworth Capital Bank or the official position of the company itself.