Is this what Jeremy Grantham was thinking while writing his latest quarterly letter to GMO clients? Only he knows the intent, but I know the outcome, and it surely wasn't usable investing insight. Grantham's letter, titled “Ten Quick Topics to Ruin Your Summer,” and reprinted by Barron's and retitled “Jeremy Grantham: The Top 10 Topics That Really Matter,” is a full-court-press Malthusian effort. It's plot material for every D-rated movie: The altruistic genius steps forth to save the world, but the imbecilic proles thwart his efforts, so the world ends, with the proles kicking and screaming as the genius sighs and says, “See, I told you so,” as everything fades into oblivion.
The world, when it ends, will never end the way Grantham envisions. There are no elite geniuses to save the day, nor would we want any of them to. A Yeoman's intelligence combined with curiosity and alert entrepreneurial instincts, on the other hand, will save the day much more often than not.
I'm sure Grantham won't save the day because his monograph oozes solipsism and sophistry. And what for? The same shopworn worries that have unsettled grandees for decades, and in some instances, centuries: population growth, food supply, the weather, inequality, economic growth, capitalism. Grantham is a true Doubting Thomas, both Malthus and Hobbes.
But Grantham not only worries, he obsesses. His raison d'être to quote his monograph, “[T]o obsess about anything that seems both relevant and interesting… .” and, “[T]o obsess about anything that seems both relevant and interesting, which for the time being has come down to 10 topics that really matter, at least in my opinion.”
Grantham is not alone in his obsessing this summer. I obsess as well, though not over ruining summer with omphaloskepsic musings that not only fail to persuade, but repel. Grantham, of course, believes otherwise. He begins his monograph as a wannabe Cassandra, but by the end, the reader is so fatigued by ad nausuem whining that Grantham has relegated himself to the densely packed crowd of Chicken Littles.
I view the world differently. My preference is for Grantham to keep his world-saving nostrums to himself. As Charles de Gaulle aptly noted, "The cemeteries of the world are full of indispensable men." I don't wish this fate for Mr. Grantham, just his obsessions. My antipathy is driven in part by the influence of another luminary, H.L. Mencken, who wrote, "The kind of man who wants the government to adopt and enforce his ideas is always the kind of man whose ideas are idiotic."
I can't think of an instance where Mencken was wrong. Many of Grantham's ideas are ideas, or obsessions, he wants the government to adopt. So, here we have Grantham's top 10 obsessions followed by a deserving riposte.
1. Pressure on gross domestic product growth in the U.S. and the balance of the developed world: count on 1.5% U.S. growth, not the old 3%
Grantham offers the usual bugaboos for why growth (and by way, living standards) will creep instead of sprint in the future: income inequality, diminishing resources, under investment, aging demography, climate change (what doesn't climate change screw up?).
In a fit of expediency Grantham resorts to “loss of low-hanging fruit.” Everything easy has been done. I'm surprised Grantham didn't chime in on “synergies;” “thinking outside of the box; “drinking the Kool-Aid;" or my favorite, “If a martian landed, what would he think?” Everything is low-hanging in hindsight; while you're actually picking the fruit it can feel like your on tip-toes atop a 30-foot latter. Nothing successful is ever easy while you are doing it. Grantham should know better than to lean on such an intellectually flaccid cliché.
Obsessing over slow growth leads to obsessing over GDP percentages. But why? GDP says nothing about the welfare of a nation. Japan has experienced years of GDP stagnation, and yet its citizens today are better off than a decade earlier. Most products offered in 2015 are superior in quality and value to those offered in 2005; nearly all are superior to those offered in 1995. The percentage might stagnate, but human welfare doesn't.
Besides, what is GDP measuring anyway? Final sales of goods and services, which means it downplays the supply chain and intermediate stages of production needed to produce all those finished goods and services. Investment and production are just as important to economic growth as consumer spending.
Therefore, is knowing a broad-based aggregate statistic like GDP meaningful to an individual or to a company? No,but it is a convenient interventionist tool for the bureaucrat. Bureaucracy requires classification of economic facts into a few broad bands of manageable "homogeneity.” Bureaucracy abhors differences because it simply cannot operate in a field of bewildering individual complexity. The aggregate numbers are more for them than us. The aggregate number -- GDP included -- engenders intervention and bad policy.
If no one calculated GDP, no one would obsess over GDP, and we'd all be the better for it. John Cowperthwaite, financial secretary of Hong Kong during its miracle decade of 1961 to 1971, was asked about the one reform that pleased him most. Cowperthwaite replied, “I abolished the collection of statistics.” If the United States were so fortunate to abolish national statistics, we'd at least relieve Grantham of one obsession.
2. The age of plentiful, cheap resources is gone forever
With this obsession, I must be blunt. This is the most useless and wrong-headed obsession of the list. First, Grantham offers no evidence to support his claim. It's all conjecture. He simply declares, “All in all I am still very confident, unfortunately, that the old regime of irregularly falling commodity prices is gone forever.”
Obsess about the sun going black, but don't obsess about resources (natural), cheap or otherwise. As long as the world avoids devolving to a point where Ministries of Plenty oversee resources, resources will always be plentiful, and very likely cheap. More important, they will remain cheap relative to income and spending power; that's all that really matters. Does efficient use of resources give you more bang for the buck? The answer through history has been an unequivocal "yes."
Donald Boudreaux, economics professor at George Mason University and blogger at CafeHayek.com offers the following insight on the efficient use of natural resources. Boudreaux compares prices, quality, and percent of income from 1975 goods (offered by Sears) to comparable goods in 2013. Specifically, he compares the typical worker in the United States in 1975 to one in 2013. Here's a sample of what the worker could buy and the number of work hours it would take to buy it. .
- Manual treadmill: 1975 price was $89.99 (or 18.5 hours of work in 1975); 2013 price is $127.99 (or 6.5 hours of work today)
- adult athletic shoes: 1975 price was $9.95 (or 2.0 hours); 2013 price is $19.99 (or 1.0 hour)
- adult jeans:* 1975 price was $6.99 (or 1.4 hours); 2013 price is $19.99 (or 1.0 hour)
- television (19″ color): 1975 price was $294.95 (or 60.6 hours); 2013 price is $129.99 (or 6.6 hours)
- 30″ kitchen all-electric range/oven: 1975 price was $159.95 (or 32.8 hours); 2013 price is $369.99 (or 18.6 hours)
- frost-free refrigerator/freezer:** 1975 price was $319.95 [for 14.1 cubic feet] (or 65.7 hours); 2013 price is $404.99 [for 14.8 cubic feet] (or 20.4 hours)
- “standard size” all-electric washer/dryer combo: 1975 price was $329.90 (or 67.7 hours); 2013 price is $593.98 (or 29.9 hours)
Of course Grantham could counter, "That's yesterday, I'm talking about tomorrow." True enough, but Grantham errs in his calculus by conflating supply with value. He states, “I will no longer worry about the three important commodities that are relatively plentiful: bauxite (aluminum) at 8.2%, iron ore at 5.6%, and potash (potassium) at 2.1%."
As for me, I won't worry about any commodity -- plentiful or scarce -- because the value in a commodity is extracted by the humans who manipulate them. The commodity itself has no innate value. At one period, nearly all commodities (metals, specifically) had no value to anyone. It was discovery and innovation that teased valued out of dirt. Humans create value by intelligently acting upon natural resources. Natural resources are valued for their potential to become higher-order goods. It is this potentiality that counts. And if a shortage, evidenced by price, should arise in a desired natural resource, an intelligent entrepreneur will move earth and heaven (literally) to supply it.
Julian Simon rightly noted that the “ultimate resource” is not any particular physical object but the capacity for humans to invent and adapt. For this reason, seemingly finite resources never run dry. Grantham looks to the earth's crust for value; I look to the human mind.
Grantham's oil obsession reads like the lecture of the pedantic college professor: The obsession is larded with exact percentages that imply an outcome is etched in stone. To wit: “But, here is the problem. The cost rises exponentially as one moves up the recovery curve, and somewhere between 75% and 85% recovery we are unlikely to be able to afford the cost. In fact, the energy required to recapture more starts to overtake the energy produced. Checkmate. A move from 60% recovery to 80% (to be friendly) in the next 35 years would represent a 33% increase, or about 0.9% a year."
Underneath the precise numbers are fodder for the relentless push for carbon taxes, electric cars, stricter environmental policies. So, yes Grantham is like any pedantic college professor: agenda first. It's all rote repetition of the politician left.
Grantham is unable to fathom the idea that the internal combustion engine might be the most efficient energy producer we have. The efficiency of electric cars is a joke, and it's been a joke for the past 100 years (here's an excerpt from the New York Times 1911). Without mass wealth redistribution through direct subsidies and consumer tax credits, electric cars would remain a fiction.
Why isn't further perfecting the internal combustion engine the answer to a cleaner environment Grantham so painfully wants? Because it fails to fit his political agenda that electric occupies.
The darling of the electric-car world, Tesla, is at most a monument to crony capitalism. Electric cars are expensive to make, inefficient to drive, and horribly filthy to manufacture.They are a unicorn that should be put down. It never occurs to Grantham that the billions of dollars in subsidies and tax credits are a waste. It is consumption of wealth-generating capital. Capital consumption leads to lower economic growth and falling living standards.
Grantham rightly points out that it takes higher oil prices to motivate entrepreneurs to develop new extraction techniques in order to bring new oil supply online, but that's economics 101. Oil at $150/barrel begets oil at $45/barrel; extraction techniques improve and supply arises, thus lowering prices. But Grantham asserts the paradigm is unsustainable. He writes, “The cost rises exponentially as one moves up the recovery curve, and somewhere between 75 and 85% recovery we are unlikely to be able to afford the cost. In fact, the energy required to recapture more starts to overtake the energy produced.”
Fair enough, but the world is dynamic, not static. You didn't know about fracking in 1980; you don't know what will exist in 2040. Grantham's numbers tell us nothing about the distant future. They're based only on what we know at the present.
Is it coincidence that the technologies -- electric cars, wind mills, solar power -- to replace fossil-fuel power units are all supported by the political class? Because the political class finds these technologies dear, you can be sure that if anything replaces CO2-emitting power units that measurably improve our lives, it's not even within distant sight. Therefore, much of the money and all the tears expended posturing for "green energy" is wasted capital and wasted energy.
Here's another observation on the alternatives that I never hear: Why is everything so retrograde? 19th-century electric cars, 12th-century Dutch windmills, 5,000-BC solar harvesting. Why not attempt to resurrect whale oil to supplant crude? It makes as much sense.
4. Climate Problems
I'm old enough to remember the 1970s. Back then, pollution and CO2 were destined to condemn the earth to an uninhabitable iceball. Humans would become extinct. (That is if they hadn't first been extinguished by endless swarms of killer bees. I'm not kidding; Africanized bees were a perceived threat.)
As it became more evident a freeze-over was unlikely, the focus shifted to global warming, and then to the all- encompassing “climate change.” With climate change, you can't possibly go wrong. Yes, the climate, as does the weather, changes. Because it changes, you can conveniently shoe-horn in the variable for the change that best fits your agenda. You'll notice that no one says, “My, this is an average spring, summer, fall, or winter.” Instead, the two-foot snow storm or the 99-degree day is elevated to the new normal. Of course, the lead variable for the new normal is always anthropogenic. (How about blaming the sun once in a while?)
For Grantham, weather is conveniently abnormal, “with many more records than normal of droughts, floods, most particularly, heat.” 2014 was putatively the hottest year on record, or at least since 1880. This may be true, or not. But for a planet that's a few billion years old, is 135 years a significant enough time period to glean any meaning? Possibly not.
Everything Grantham says on climate change should be taken through a filter (the same for what I say). Grantham's climate views aren't driven by science, as he claims, they are driven by bias. A preconceived outcome (or agenda) is forwarded, and then the data are mined to support the outcome (John Iannnidis of Stanford University exposes the extent of false scientific research here). Climate science is no different (see here and here.).
Even Grantham's desire to tax a putative negative externality like carbon emissions won't produce the desired benefits. A carbon tax scheme is first a revenue-raising and wealth-redistributing scheme. It will not be revenue neutral. In the history of taxation, a new tax has never been revenue neutral. This is why carbon-taxes and climate control are important: They enable an elite minority to impose its will and to profit from the majority.
5. Global food shortages
Will it ever end? Since Thomas Malthus, there has been an endless stream of alarmists shrieking that if we fail to change course, our cupboards will be as bare as Mother Hubbard's. Jeremy Grantham is just one in a long procession. Grantham has seen the research, and here's what it tells him:
"Without any new and improved responses from us, the results are dismaying: Prices of wheat, corn, soybeans, and rice were all predicted to be at least four times the levels of 2000. (They are currently about double.) The team concluded, 'The results show that based on plausible climate trends and a total failure to change course, the global food supply system would face catastrophic losses and an unprecedented epidemic of food riots. In this scenario, global society essentially collapses as food production falls permanently short of consumption.'”
Setting aside the fact that we don't know if Grantham is speaking in nominal or real terms on prices, and that I'm unconvinced climate trends forwarded by Grantham are “plausible (Climate change has done nothing to impede agricultural output. Since 1948 (at least) output has trended in only one direction -- up.), the answer to food shortages is simple: free markets. There is always a flood, a hurricane, an earthquake somewhere. Local food supply chains are continually disrupted. If the local government has implemented mercantilism policies, shortages arise and starvation ensues (see the Irish potato famine.) Forcing people to eat locally is a recipe for disaster. This is one of many reasons I haven't adopted the locavore's creed.
To avert disaster, farmers have to be secure in their property. They have to know they own the land, and they have to know they own what they grow. And what they grow, they have to be free to sell – anywhere. By establishing sound property rights and abolishing tariffs and quotas, the world is assured of a rich diversified food supply. So if a drought hits Nigeria or a flood overtakes Bangladesh, food is available because it has already been sourced from elsewhere.
When free markets are combined with enforced property rights, obsessions miraculously disappear.
6. Income inequality
How much more does the average CEO make compared to the average worker in the United States? A hundred times? Two hundred times? (Grantham quotes 300 times.) No, less than four times. Income isn't quite as unequal as you might think. In 2013, the Bureau of Labor Statistics reported that the average pay for America’s 248,760 chief executives was $178,400. The average annual pay for all workers was $46,440.
Though the difference is less than four times, it's still unequal. Where there is income inequality, there will likely be wage stagnation. Grantham follows the script flawlessly. He predictably sites statistics that show the middle-class has made little process in wage growth in the past 40 years. Actually, the average hourly wage in real dollars has remained largely unchanged from at least 1964, the year the BLS started reporting such figures. It's even worse than Grantham thinks.
That said, things aren't as dire as they seem: The figures don't account for product quality and variety. We can buy more stuff, and that stuff is of higher quality today than was available in 1964 (see obsession no. 2). The wage figures also ignore nontaxable compensation – fringe benefits. These benefits as a percentage of total compensation have risen meaningfully over the years. Today, health benefits, pensions, paid leave and the rest now amount to an average of almost 31% of total compensation for civilian workers, according to the BLS. (read more here).
As for wealth distribution, Grantham is, of course outraged, and supposedly so are many Americans, except we don't know it. Grantham draws on research by Dan Ariely, a psychology and behavioral economics profess at Duke University. Ariely surveyed 5,000 Americans, who, we are told, were “carefully selected to be a balanced representation of the population.” It turns out we prefer the Swedish model of egalitarian wealth distribution to our own.
But like the watched atom, the watched human is never sincere. Grantham fails to provide the questions Ariely asked, nor how they were worded. How they were asked also matters. This is something every political pollster knows. You want the desired result, ask questions that lead in that direction. I suspect most Americans couldn't care less about income inequality. If you notice, It's never the proles who whine about income inequality, its the nervous rich, like Grantham, who fear one day the proles will not only whine, but revolt, thus putting his wealth in jeopardy. Grantham need not obsess; the successful jacquerie is as elusive as the efficient windmill.
If wealth and income are earned honestly, no one cares about the spread. Even the most unrepentant socialist instinctively knows the economy isn't a fixed pie. Bill Gates' $75-billion net worth isn't offset by a counter-balancing amount of privation elsewhere.
7. Trying to understand deficiencies in democracy and capitalism
I agree with Grantham that democracy has its deficiencies. You could even argue democracy as a political process has failed. Will-of-the-people movements frequently align with the two wolves against the sheep. But I disagree that the elites are as powerful as Grantham fears. After all, the top 1% paid nearly 46% of all federal income taxes in the United States last year. Of course, income and wealth aren't synonymous. It's possible to have one without the other, but 46% does seem a bit unfair.
The reality is that legislation has always been driven by concentrated interests. Organized minorities form and lobby to pass legislation, even if the majority prefer it not pass (see the Affordable Care Act). This is how a democracy (and our own representative republicanism) has worked since day one.
Broader inclusion won't change this dynamic. “Government of the people, by the people, for the people” sounds good in theory, until you see it practice. Talk to a neighbor or colleague about anything political. You'll soon find yourself thinking, “Good God, this person actually votes.” The knowledge and reasoning skills of most Americans underwhelms. More inclusion isn't the answer. Indeed, I'd prefer far fewer people voted. Yes, the elites drive the issues, but having the issues driven by Joe Six-Pack won't lead to more efficient outcomes.
As for capitalism, Grantham begins my mentioning “a failure to be inclusive,” but than his thoughts wonder. Most of his discourse focuses on stock options, short-term thinking, and Federal Reserve manipulating the economy (here, I agree.).
Grantham also sentimentalizes over a time that never existed. Grantham writes:
"Capitalism has steadily dropped its baggage of stakeholders, with the exception of senior corporate officers in first place and stockholders in second. Interest in local communities, cities, states, and countries of origin has been largely put aside as has the previous jewel in the crown of responsibilities to workers, the defined benefit pension fund. At a time of provable abnormally high corporate profits as a percent of GDP, corporations have argued that defined benefit pensions are not affordable. That they are dropping them should come as no surprise, for defined contribution plans (in general less attractive to employees than defined benefit plans) are much cheaper and easier on accounting predictability. What is surprising is why they adopted defined benefit plans in the first place, when they did not have to. And why did they have, in the 1935 to 1985 window, a sense of a social contract, suggesting that other things mattered besides maximizing short-term profits?"
Capitalism never held the stakeholder baggage in the first place. The neologism “stakeholder” gained traction only in the last two decades of the 20th century. Stakeholder is a new-age, touchy-feely concept.
Of course, everyone has an interest in his community and the country at large, but you don't have an obligation to go beyond what the law requires. A corporation is formed to profitably bring goods and services to market and to generate a return to the owners, the shareholders. Owners always come first. It doesn't matter if it's a sole proprietorship or a corporation that employees half-a-million people. (This will sound cold, but employees are no more than factors of production.)
Corporations in the U.S. version of capitalism have long been interested in keeping their most valuable employees fat and happy. Up until 1938, pensions were reserved for the top employees, but then came the Revenue Act of 1938, which addressed what was perceived as a tax dodge for the rich. The Revenue Act of 1938 outlined specific requirements for “tax-qualified” pension plans, including the requirement that benefits and contributions not discriminate in favor of highly compensated employees. It wasn't corporations embracing stakeholder charity that swelled the ranks of pension recipients. It was tax law, and the incentives it engendered.
As for stock options, I generally agree with Grantham's take on the free and easy ways stock options are written and distributed to executives. Again, incentives are the issue. Look to tax law and incentives that promote the problem, not some recondite failure of modern capitalism.
8. Deficiencies in the Fed
Grantham let's the title speak for itself and doesn't go beyond it.
9. Investment bubbles in a world that is, this time, interestingly different
Here, Grantham and I finally agree. The Fed's complicity in investment bubbles is without question. In this section, Grantham writes the most cogent passage in his monograph. Says Grantham, “I used to say that profitability was the most dependably mean-reverting series in finance, and it used to be. When it stops, capitalism is broken, at least partially, and needs fixing as quickly as possible. The process occasionally gets jammed up, but not on its own – it needs some maladjusted, non-free market interference. “ There is nothing more I can add.
10. Limitations of homo sapiens
Grantham's no. 9 obsession and the comity it promotes prove fleeting -- a brief interregnum -- for again we disagree.
Grantham begins this final obsession by stating, “After reading all of this you may think that I am particularly pessimistic. It is not true: It is all of you who are optimistic!” In other words, it's not me, it's you. This is the opposite tack taken when you break up with your significant other, or your significant other breaks up with you: No, it's me, it's not you. With Grantham, you and I got it all wrong. Grantham's not a pessimist, though he expends 7,500 words convincing us he is.
Grantham makes a few obvious points on bias confirmation, though he excludes himself as being biased. “Facts,” writes Grantham, “whether backed by 97% of scientists as is the case with man-made climate change, …, do not count for nearly as much as we used to believe.” Perhaps because there is still sufficient doubt to the facts. Yes, humans likely contribute to climate change, but the question isn't if we contribute, it is the degree we contribute. (Toss a pebble into a swimming pool and the water level will rise.) Here, the facts are very much contested, as are the nostrums, whose costs could just as easily (and likely) outweigh the benefits.
Grantham ends this final lament/obsession, with one more offensive. “For that matter, we do a terrible job of planning for the long term," he writes, "particularly in postponing gratification, and we are wickedly bad at dealing with the implications of compound math.”
I view this more as response to an incentive than an inherent limitation. A whole strain of economics – Keynesianism -- is predicated on instant gratification. Give a person an incentive to take immediate gratification, he'll take. If we are terrible at math, look no further than the incentives rewarded in public schools. Presented with the right incentives, I have unwavering faith in the potential of homo sapiens.
If this makes me an optimist, so be it. Pessimists too frequently go off the rails for my liking. The following predictions – along with attribution – of impending doom were made on and around Earth Day 1970 (compiled by Ronald Bailey at Reason Magazine). Everyone went far off the rails, and embarrassingly so. Read and revel in the epicaricacy.
- Civilization will end within 15 or 30 years unless immediate action is taken against problems facing mankind." — Harvard biologist George Wald
- "We are in an environmental crisis which threatens the survival of this nation, and of the world as a suitable place of human habitation." — Washington University biologist Barry Commoner
- "Man must stop pollution and conserve his resources, not merely to enhance existence but to save the race from intolerable deterioration and possible extinction." — New York Times editorial
- "Population will inevitably and completely outstrip whatever small increases in food supplies we make. The death rate will increase until at least 100-200 million people per year will be starving to death during the next ten years." — Stanford University biologist Paul Ehrlich
- "Most of the people who are going to die in the greatest cataclysm in the history of man have already been born… [By 1975] some experts feel that food shortages will have escalated the present level of world hunger and starvation into famines of unbelievable proportions. Other experts, more optimistic, think the ultimate food-population collision will not occur until the decade of the 1980s." — Paul Ehrlich
- "It is already too late to avoid mass starvation," — Denis Hayes, Chief organizer for Earth Day
- "Demographers agree almost unanimously on the following grim timetable: by 1975 widespread famines will begin in India; these will spread by 1990 to include all of India, Pakistan, China and the Near East, Africa. By the year 2000, or conceivably sooner, South and Central America will exist under famine conditions…. By the year 2000, thirty years from now, the entire world, with the exception of Western Europe, North America, and Australia, will be in famine." — North Texas State University professor Peter Gunter
- "In a decade, urban dwellers will have to wear gas masks to survive air pollution… by 1985 air pollution will have reduced the amount of sunlight reaching earth by one half." — Life magazine
- "At the present rate of nitrogen buildup, it's only a matter of time before light will be filtered out of the atmosphere and none of our land will be usable." — Ecologist Kenneth Watt
- "Air pollution...is certainly going to take hundreds of thousands of lives in the next few years alone." — Paul Ehrlich
- "By the year 2000, if present trends continue, we will be using up crude oil at such a rate… that there won't be any more crude oil. You'll drive up to the pump and say, ‘Fill 'er up, buddy,' and he'll say, ‘I am very sorry, there isn't any.'" — Ecologist Kenneth Watt
- "[One] theory assumes that the earth's cloud cover will continue to thicken as more dust, fumes, and water vapor are belched into the atmosphere by industrial smokestacks and jet planes. Screened from the sun's heat, the planet will cool, the water vapor will fall and freeze, and a new Ice Age will be born." — Newsweek magazine
- "The world has been chilling sharply for about twenty years. If present trends continue, the world will be about four degrees colder for the global mean temperature in 1990, but eleven degrees colder in the year 2000. This is about twice what it would take to put us into an ice age." — Kenneth Watt