Practical analysis for investment professionals
26 May 2016

Economic Thinking That’s Ready for Retirement

Posted In: Economics, Future States

If I win, you lose.

It’s an insight that anybody who’s spent time on a playground has had at some point or another. And for a broad spectrum of human activity, it’s completely correct. Most games have winners and losers. And usually, wanting to win promotes good behavior.

I’ve been both a player and a coach, and I have never found a better approach than getting enough sleep, eating right, and showing up ready to work hard. If you’re having fun, the rest is detail. And healthy competition tends to encourage exactly this sort of good behavior.

But there is only so much you can learn from the playground, and unfortunately, there is an all-too-common tendency to apply schoolyard logic in places where it has no bearing, such as international trade.

So, I was glad to see that when we asked CFA Institute Financial NewsBrief readers which of four economic ideas is most ready for retirement, a plurality (42%) of 675 respondents chose the notion that one country’s growth is another country’s lost opportunity.

That is not how things work.

For one, considering economic trends in the context of countries winning and losing is about as cutting-edge as mercantilism, which institutionalized such analysis.

As the fall in oil prices reminded us over the past two years, sometimes it really is the case that nobody is in control. Winds blow, and some countries are better placed to harness them than others. Indeed, too much focus on winning can cause the analyst to believe a sovereign is at its strongest just as the weather shifts.

It can also give rise to protectionism, a force today’s leaders seem unable to resist despite repeated (and increasingly humiliating) protestations to the contrary. Following a November 2008 G–20 summit in Washington, D.C., world leaders released a statement underscoring “the critical importance of rejecting protectionism and not turning inward in times of financial uncertainty.”

This was reiterated again by the same group in 2009, with a communique that read, “We will not repeat the historic mistakes of protectionism of previous eras”.

That sentiment lasted for about a minute. A 2012 report titled “Débâcle,” by Global Trade Alert, provides a good summary of how what was done differed from what was said.

Spoiler alert: It did, a lot.

In a 2015 report for the European parliament’s think tank, authors Roberta Barone and Roberto Bendini laid to rest any hope that world leaders had actually stayed true to their word, writing: “Unfortunately, this pledge to refrain from adopting new trade-restrictive measures — and to roll-back those in place — has not been honored. For the sixth year, the global institutions monitoring protectionism in the G–20 have confirmed the accumulation of new trade-restrictions and few efforts to liberalise trade.”

Now stop for a second and think. How did the preceding couple of paragraphs read to you: like good news? Bad? You’re wrong in either case. In particular if you’re a die-hard free-trader, I would encourage you to examine what happens to labor markets as business adapts to the sorts of sudden trade shocks that come from low-priced foreign competition.

There is no doubt that a good long-term plan to nurture a domestic industry might involve some tariffs or trade restrictions at some point. The excellent (and now basically free) book The Silent War: Inside the Global Business Battles Shaping America’s Future details some cases in which governments have deployed restrictive policies to develop the groundwork for future economic miracles.

Which economic idea is most ready for retirement?
Which economic idea is most ready for retirement?

The second-place finisher in our poll, with 28% of the vote, was the premise that free market competition always creates positive outcomes. I’ve got a little statue of a bull on my desk right next to my nameplate, and am generally inclined to be in favor of markets  — but they can be shortsighted sometimes. Some current examples of objectionable activity we can thank free market competition for: marketing e-cigarettes to children, unregulated gold mines dumping mercury into Amazon rivers, and ultrasound clinics in Ontario that show you stock photos instead of your baby.

Each of these each seem like open-and-shut cases where regulatory attention is warranted. But it’s important to remember that something is lost every time something is regulated, and it’s deeply tricky to effectively police what should not be done without stamping out activity that could have been productive. I don’t think it’s hyperbolic to suggest that a child could needlessly die because these fly-by-night ultrasound clinics prevented parents from recognizing that a pregnancy is in trouble. And their presence erodes trust in generally hardworking medical professionals. But it’s not trivial to eliminate them (or any of these other practices) without creating bottlenecks. Unfortunately, “prudent regulation” does not have the curb appeal of “free markets.”

Emergent themes.

The last two responses nearly split the balance of the vote, with the premise that individuals need paid employment to contribute to society receiving 15% and the thought that GDP is the best measure of a country’s economic activity getting 15%.

This makes sense: they are quite related. Both augur in one way or another for some means of evaluating activity that is not denominated in currency. The shortcomings of GDP are documented well enough that the European Commission has a page dedicated to quotes enumerating them as part of their “Beyond GDP” initiative.

It also may surprise you to note that it’s not a measure as deeply baked into history as, say, profitability or revenue. A quick search of published books shows that GDP experienced a sharp upswing in usage during the 1990s, rather than the sustained level of interest that you might expect.

The premise that we should detach a job from the notion of one’s economic value is also gaining significant steam, with interest in a so-called “basic income” even reaching Bill Gross’s latest investment outlook. Here is a great summary of what that entails.

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All posts are the opinion of the author. As such, they should not be construed as investment advice, nor do the opinions expressed necessarily reflect the views of CFA Institute or the author’s employer.

About the Author(s)
Sloane Ortel

Sloane Ortel is the founder of Invest Vegan, an ethics-first registered investment adviser that manages distinctive discretionary portfolios of public equities on behalf of aligned individuals and institutions. Before establishing her own firm, she joined CFA Institute’s staff as a sophomore at Fordham University and spent close to a decade helping members adapt to a changing investment landscape as a collaborator, curator, and commentator. She is also a co-host of Free Money, a podcast for sustainability-oriented investors with a sense of humor.

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