When a memo from Howard Marks of Oaktree lands in my inbox, it is the first thing I open. I never fail to learn something valuable from his insights.
Here is a section:
There are so many examples of governmental attempts to ignore or override the laws of economics that it is daunting to think of cataloging them, but I must discuss a few here, and their shortcomings:
Another component of Harris’s economic program is a plan to give first-time homebuyers USD25,000 to help with down payments. Certainly, it is hard these days for young people to come up with the cash needed to become homeowners.
The problem here is that giving a million would-be buyers USD25,000 each, or USD25 billion in all, would almost certainly result in an immediate increase in home prices, eliminating much of the hoped-for benefit from the program.
Easy: that can be prevented by passing a law that prohibits current sellers from raising home prices in response to enactment of the program. What about homes that will come onto the market in the future? Simple: enact another law that says you cannot ask more for your home than you would have if the program did not exist. Try enforcing that one.
When he was president, Donald Trump enacted tariffs on goods from China to counter trade practices he considered unfair. Now, he promises a 10% across-the-board tariff on imports. Those tariffs might discourage imports, stimulate domestic production, and reduce the US’s chronic trade deficit. They would likely be paid by consumers of imported goods, as manufacturers and exporters are unlikely to absorb a tariff if they can pass it on.
For many years low-cost imports have held down inflation in the US and enabled Americans to enjoy an attractive standard of living. Broad new tariffs are likely to be the equivalent of price increases for American consumers. The tariffs and those imposed by other nations in retaliation would hamper globalization, which benefits the global economy by letting people in each nation do for the world what they are best at.
Trump’s policy proposals also include extension of his expiring 2017 tax cuts and a panoply of new ones. There is something for everyone, with tax cuts for corporations and individuals, including ending the taxation of tips, Social Security benefits, and overtime pay. The Penn Wharton Budget Model estimates that in 2026, the plan would reduce taxes by USD320 for the average person in the bottom income quintile and USD47,220 for those in the top percentile.
Even without factoring in the latest proposals, like exempting overtime pay, these actions are projected to increase the national deficit by USD5.8 trillion over the next decade, or USD4.1 trillion after incorporating their potential stimulative impact on the overall economy (so-called “trickle-down effects”). Other than that possibility, there is no suggestion the cuts would be paid for.