"Cornucopians" and "neo-Malthusians"

In our previous post (on Thanksgiving), we noted the prevalent symbol of the cornucopia, closely associated with that holiday.  

It is an appropriate symbol, for in spite of all the problems in the world today, we can all admit that there is much to be thankful for, and that while unending goods and services do not simply appear miraculously (as they do from a cornucopia), the innovation and hard work of countless men and women operating under the free enterprise system have in fact created an abundance of very good things.  Among those we might list are new medical treatments, semiconductors and networks and all that they enable, increasing harvests of food, and many other wonders.

 

There have certainly been those along the way, however, who have shaken their head at this increasing prosperity, called it illusory or even a dangerous fiction, and issued dire pronouncements which generally centered around the warning that production cannot keep up with consumption forever, and that "we" must take steps to limit demand -- usually by limiting population growth, or even by limiting population.  Some of those in this camp actually refer to those who do not share their zero-sum fixed-pie view of the world as "cornucopians," which they use as a term of derision.

Here is a webpage written by a current university professor who uses that term, and who clearly comes down on the side of the anti-cornucopians (although it is billed as an examination of the "perspectives" of both sides, the zero-sum arguments take up the majority of the essay).  Here is another one, also written by a (different) university professor, and also coming down against the assertions of the "cornucopians".  One wonders if anti-cornucopians celebrate Thanksgiving, and if so whether they have cornucopias as part of the decorations or not.

Fortunately, history has decisively proven the zero-sum paradigm to be bankrupt.  Those economic systems that have enabled people to innovate and create and produce have seen results in direct proportion to the degree that they have done so.  Those economic systems that tried to enforce a zero-sum view of the world (seizing what others produce, with the result that nobody wants to produce anymore) have generally collapsed, and sometimes they have even been replaced with systems that give their people more freedom to innovate and grow.

It is astonishing that many continue to espouse extreme zero-sum ideologies, to the point that the arrival of the seven billionth person on the planet last year was celebrated with a National Geographic site that asks "are there too many of us?" and with articles asking whether a world-wide "one-child policy" might be a prudent idea.

Students of economics and history will immediately recognize these lines of argument as "Malthusian," after the Reverend Thomas Malthus.  In fact, both of the university professor-authored papers cited above specifically use the term "neo-Malthusian" as the opposite of "cornucopian," and align themselves with the "neo-Malthusian" camp.  The neo-Malthusians are pessimistic about the idea human innovation will keep us ahead of ongoing demand placed on resources, particularly as populations continue to grow.

The counter to this argument, to which some of the neo-Malthusian authors do make reference, is the idea that it is a mistake to look at growing populations only as potential consumers of resources, rather than as the most important multipliers of resources, through their innovation.  In other words, each person is not just a potential problem but a potential solution, because human innovation actually creates new resources as if by magic (like a cornucopia!).

Innovation makes things in our natural world become resources that were previously useless.  For example, until cars, ships and airplanes could use petroleum products for fuel, petroleum was not a desirable resource.  It was the innovation of human inventors that made today's resources "turn into" resources in the first place!  Therefore, while future population growth will certainly create greater pressure on existing resources, the future innovation and inventions of some of those members of the future population will almost certainly "create" new resources that we don't even think of as resources today.

This is why, as investors and as believers in the free enterprise system, we are so convinced of the importance of growth and innovation -- and in the importance of providing capital to innovators and to innovative companies.  It is also why we are so convinced of the importance of keeping the obstacles to growth and innovation as low as humanly possible.

Ironically, as defenders and supporters of capitalism and free enterprise, we are on the more "cornucopian" side of the equation, rather than the "Malthusian" (or "neo-Malthusian") side of the equation.  In popular literature and movies, "capitalists" are often depicted as heartless Malthusians, one of the most famous being Ebenezer Scrooge in the Christmas Carol of Dickens, who makes a reference to helping the poor as being wrong, saying that it would be better for the hungry to hurry up and die, in order to "decrease the surplus population."

We would argue that the popular association of capitalism with Malthusianism is wrong, and that it is the proponents of free enterprise who understand that the pie is not necessarily a fixed pie but that it can be a miraculously growing pie, and that people cannot be "surplus" because it is people who make that pie grow!

Again ironically, the neo-Malthusians of today are often found in the halls of academia and the centers of government; both of which are centers of zero-sum thinking.

This is an important subject, and one that investors should understand.  It is one that has important bearings on investment, and one that points to the message which we have woven into our posts throughout the history of this blog, that growth really is the answer.

Happy Thanksgiving, 2012!

As this previous post points out, we recently celebrated the fifth anniversary of this blog, which means that as Thanksgiving approaches for 2012 we already have five previous Thanksgiving posts to look back on from prior years.  You can re-visit them yourself by following these links: 

• 2011
• 2010
• 2009
• 2008
• 2007

 All of those previous posts featured the image of a "cornucopia," a traditional Thanksgiving motif.  The cornucopia (or "Horn of Plenty") symbolizes abundance of blessings, in fact a miraculous super-abundance -- one which cannot be depleted and in fact never runs out.  It is a fitting symbol for a holiday that commemorates that feast celebrated in 1621 to give thanks for their first successful harvest by the pilgrims of Plymouth Bay Colony, joined by the Wampanoag Indians led by Massasoit (who actually provided much of the food).

Those settlers, who had experienced hunger and even seen loved ones and friends die of starvation, did not take food for granted, and Thanksgiving was established to remind successive generations that we should not take the blessings that we enjoy for granted either (noting that sufficient food is one of the most fundamental of those).

In our previous Thanksgiving posts, we have also pointed to the importance of economic production -- and a focus on the production side of the economic equation -- because increased production makes the "pie" bigger for everyone.  Many economists focus excessively on the consumption side or "demand side" of the equation, and by doing so fall into the error of viewing the world as a "fixed pie" or "zero-sum" situation, in which scarce resources must be divided up between competing populations and an increase in population necessarily means that someone will have to get less or even go without.  We have long rejected that view.

Fortunately, in this country, economic liberty has created an environment in which people are largely free to innovate, create, and produce, and that environment has attracted an influx of people from all over the world who have done just that -- with the result that production has been so abundant it really does at times resemble a cornucopia.
 
This Thanksgiving, we can be thankful for our freedom and belief in the value of every human being as well as each of our ability to be the real solutions to basic economic problems.

We wish all of our readers a very happy Thanksgiving 2012.

Missing from the discussion of the fiscal cliff: GROWTH!

Here's a video clip of Gerry Frigon speaking on television yesterday, November 13, 2012 about the "fiscal cliff" and the larger issue of economic growth.

Yesterday we wrote that the hype about the fiscal cliff should spur lawmakers on both sides of the issue to tackle some real and fundamental tax reform, doing away with the rat's nest of exemptions in order to support a lower, flatter tax. 

In the above clip, Gerry reiterates a belief that is at the heart of our investment philosophy: that growth is the answer to solving the economic problems that the US -- or any other country -- faces.  Any suggestions for changes to the tax code are only valid to the degree that they promote human freedom and economic growth.  Budgetary problems such as those surrounding the fiscal cliff can ultimately only be alleviated by economic growth.  Even the problems in Europe cannot be solved by "austerity" in the long run -- they can only be solved by a vibrant, healthy and growing economy which supports business formation.

Previous posts on this subject include:

• "Growth is the answer: the primacy of human creativity"

• "'Austerity' is often a code-word for 'anti-growth measures'"

• "The problem with 'austerity' plans: Europe should cut spending AND cut tax rates"

It is our view that this is an issue that all can agree on, regardless of politics. 

How to fix the fiscal cliff: let go of the sacred cows!

Now that election week is behind us, Wall Street and markets around the world are focusing on the looming  US "fiscal cliff," which is dominating the talk in the financial media and which is in fact a very significant topic.

In case you are still a little hazy over the exact size and shape of the fiscal cliff towards which the US budget has been speeding since passing the "Budget Control Act" in 2011, this CNN Money article published in August of this year contains a fairly good rundown of the specific cuts to spending and the specific increases in taxation which will go into effect in January unless lawmakers and the president sign new legislation before the New Year.

This Wall Street Journal video also does a decent job of explaining the current budgetary mess, along with some cool "high-speed whiteboard drawing" footage and some footage of actual cliffs with sheer drops into yawning gorges coursing with icy mountain streams.

While the politicians are already posturing over which taxes will be raised or which programs deserve to be cut, we'd like to offer a solution which we believe should be welcomed by everyone, no matter what their political affiliation: let go of the sacred cows!

By "sacred cows" we are referring to the "loopholes" or tax exemptions granted to various business and investment activities, presumably as some kind of incentive for behavior that the government wants to encourage (in which case these tax breaks could also be labeled "social engineering").  In many cases, these tax exemptions benefit one industry at the expense of others, by making the purchase of that industry's products less costly than they would be otherwise -- thereby making some members of those industries wealthier than they would be otherwise (which is why these industries are often referred to as "special interests," especially when they pay for lobbying aimed at keeping or increasing the favorable tax treatment that their industry receives).  

We are fully aware that, as investment professionals and members of the "financial industry," we are part of an industry with more than its share of such tax shenanigans, but we are arguing that these should be eliminated, along with the rest of them.  By getting rid of these sacred cows that have heretofore been considered untouchable, we believe that the government would be able to enact lower, flatter tax rates on everybody.  That should make everyone happy.

Of course, if you think that it is better for the general public to pay higher taxes so that your special industry can sell a product that provides buyers with a tax loophole, then you might not like our list of sacred cows that should go away.  However, if you believe that these loopholes are unjust, then you might agree with us that these special interest loopholes should be thrown out, even if you (like us) are part of an industry that benefits from such loopholes.

We can start by naming a few products that the financial industry sells which are made more attractive by the special tax treatment they receive, such as IRAs and 529 college savings plans.  How many people would really put their money into 529 plans if those plans did not have special tax treatment?  The answer is, "next to nobody."  Those 529 plans are an example of a product (in fact, an entire sub-industry) that would not even exist without the current tax code.

Another member of this category is a much older species of sacred cow, the tax-free municipal bond.  For generations, investors have deployed capital to municipalities to which they would never have considered loaning their money if it were not for the tax-free status afforded to these bonds. 

Why should muni bonds get special treatment versus any other investment?  The reflexive answer is, "because municipalities need the money!"  That's probably the argument that was used to get the entire muni-bond racket started in the first place, and to get politicians to carve out a special tax exemption for muni bonds which other investments do not enjoy.  However, a moment of reflection will show that getting rid of the tax loophole for muni bonds would not mean that municipalities would not be able to borrow money -- it only means that municipalities would have to pay interest at market rates on the money that they borrow, rather than getting a special deal given to them by politicians, which other investments do not enjoy.  Imagine how much more fastidious government officials might be if they had to compete with every other borrower, on a level playing field, for the dollars they spend!

We believe that every potential investment should have to compete equally, on its own merits, rather than getting preferential treatment because politicians have decided that one investment is more "socially desirable" than another (or because one industry group is a bigger friend to those politicians than another industry group).

Into this same category, of course, we would put all the insurance products that receive special tax treatment, including annuities (another product which, like 529 plans, would be immensely less attractive to investors if they had not been given special tax treatment by the rules of our arbitrary and convoluted tax code).  For the record, we believe insurance policies are a very important part of wealth allocation planning, but that's exactly why we do not believe it requires any special tax laws to help "nudge" people into buying more of it than they might otherwise purchase.

While we're making some of our readers either dismayed or angry (there's enough loopholes here for us to anger or alienate everybody!), what about the tax deductions on real estate loan interest?  Why should home-buyers (both first and second home-buyers) be given tax incentives to take out home loans?  We also believe that tax laws that incentivize people to purchase new real estate with the proceeds of real estate sales without having to pay taxes on the gains (the "1031 exchange") should also go!  Unless, of course, you want to make ALL capital gains tax free...but we'll leave that for the details. 

We realize as we write this post that no politician of either party dares to address such "sacred cows" of the American tax code, but we believe that both sides of the aisle should really address the inherent unfairness (and actual injustice) that these special-interest loopholes represent, long before they go raising tax rates in other areas (such as on income or payroll).  Democrats are always talking about "change," and Republicans are always talking about "free markets" (we believe they should really say "free enterprise") --  what about getting rid of these sacred cows as a first step towards real change and real market pricing?

While members of the financial industry, insurance industry, and real estate industry might initially revolt at our recommendations, we believe that is the wrong way to look at it.  We actually believe that real estate and insurance offer value to those who choose to invest in them (we might even say the same thing about municipal bonds, if they ever get rid of their politically-engineered tax loophole).  In other words, we believe that members of the real estate industry and insurance industry (and financial industry) should be proud of the products that they sell, and should not feel that they need the government's help in selling them by way of tax exemptions (which only drive up the tax rates somewhere else).

In fact, it can be shown that historically the US government takes in taxes that are roughly equal to 20% of the GDP at any given time, regardless of the different ways that legislators fiddle with the various aspects of the tax code.  Given this fact, we believe they should be able to get to 20% without all the complexity and special-interest loopholes and deductions that only serve to favor one industry over another, shifting the tax burden onto those who aren't able to wiggle through all the available loopholes.  

We believe that the government could get to 20% of GDP with lower and flatter rates on everybody.  And that would make everybody happier.

Thus, as the "fiscal cliff" haggling proceeds in the US over the next several weeks, we'd like to see leaders emerge on both sides who are not afraid to tackle sacred cows such as muni bonds, insurance tax exemptions (grandfathered going forward, perhaps), and even real estate's favored tax status, as well as low, FLAT tax rates that are in line with what government collects as a percentage of GDP.  But, we're not going to hold our breath.

Fifth anniversary of this blog!

It's hard to believe, but it was five years ago today that we started the Taylor Frigon Advisor as a way to have a conversation about the classic "Growth Stock Theory of Investment" and the principles and convictions that guide our investment management process, as well as to discuss some of the current events of the day from a perspective that might be slightly different from what you hear in the news media.

How time flies!

The world in many ways is a very different place than it was on November 09, 2007 when we published our first post.  However, the foundational principles that we discussed in that post are just as true today as they were then.  

In that post we referenced a paper that Mr. Price wrote in 1973 discussing the principles and convictions that guided his investment philosophy, and although the world had changed dramatically between 1973 and 2007 when we were discussing them, those principles were still just as valid as they were when he wrote them in April of 1973.  

For that matter, in his essay Mr. Price writes that he formed those convictions "in the early 1930s, after ten years experience in the investment business."  While the investment and business landscape of the country had changed dramatically between the early 1930s and the early 1970s, he clearly believed that those investment principles, which he articulated in that text, remained true.

This is an important lesson, and one that we believe all investors should carefully consider.  Today, on the fifth anniversary of our blog, we invite readers to pause and revisit that first post from five years ago.  As the saying goes, "The more things change, the more they stay the same!"

Even as businesses and technologies and geopolitical realities change dramatically, we believe the timeless principles of investing remain the same, if they are true.  Investment fads, unfortunately, come and go as well, but we believe that those that have stood the test of time should be shared, which is what we try to do through our writings here on this blog.  Thanks for coming along!

US election, 2012

The voters in the US have spoken, and investors are weighing the outcomes and asking themselves what the future may hold.  

We believe that the likelihood for continued growth in government is high -- something that we have previously stated has characterized the past three presidential terms (two under George W. Bush and one under the current president) and will most likely mark the upcoming term as well.  This continued growth in government may lead to slower economic growth than might otherwise have taken place.

As professional investors, we can observe a previous four-term period of bipartisan government growth and slower economic growth -- the 1970s (technically, Lyndon Johnson was not really president during "the 1970s," as Nixon was elected in the 1968 election and took office in January of 1969, but he certainly presided over a significant expansion of government and can be grouped with the other three presidents shown above for purposes of this discussion).  If you were a professional investor at the beginning of the 1970s knowing what you know today, what kinds of investments would you seek out?

We have discussed this very question in two previous posts, each published about four years ago, entitled "Return of the 1970s?" and "Return of the 1970s, part 2."  Each of those posts are still worthwhile for our readers to revisit and consider.  In those posts, we noted that the 1970s were marked by excessive taxation, increased government intrusion into the private sector, and misguided and excessively easy monetary policy which led to inflation and the massive destruction of purchasing power.  We also observed that such an environment made it more difficult for companies to grow and to innovate, and  therefore more difficult for investors to find innovative and growing companies in which to invest.

More difficult -- but not impossible.  While fewer than perhaps would otherwise have been the case, there were innovative and well-run businesses that "changed the world" in their respective fields that  came out of that difficult period of the 1970s.  In the first of the two articles linked above, published in August of 2008, we wrote:

Furthermore, it turns out that while the 1970s were marked by economic stagnation caused mainly by excessive taxation and inflation, they were also a tremendous time for some companies. In fact, maybe the 1970s weren't that bad after all. As we have written many times before, we emphasize owning businesses, not owning markets. In any economic environment, some companies grow faster than others. During the 1970s, companies not listed on the NYSE but listed on the NASDAQ began the transition from being outcasts to being important companies. Think of owning companies such as Intel, which had its IPO in 1971*. In fact, the 1970s were a golden age for small-cap investing as described in this July Forbes article, although most investors are unaware of that fact.

During difficult economic times, smaller growing companies can get a premium, because growth is generally so hard to find.  That has been true in the four years since we first published the above paragraph, just as it was during the 1970s.

As we position ourselves for the future, we will certainly look to make adjustments as necessary in light of the recent election and the prospects for increased government interference in the economy, as well as the likelihood of eventual inflation from excessively loose monetary policy.   But we continue to believe that the best course for investors is to diligently seek out well-run, innovative companies in whose growth they can participate through equity ownership -- something that becomes all the more important during periods in which such growth is more difficult to find.

This is the philosophy that Mr. Thomas Rowe Price articulated in 1973 (and which was followed by his disciple, Richard C. Taylor) based on his assessment of the situation at that time. It is a philosophy that we have discussed in many previous posts in the Taylor Frigon Advisor, and it is the philosophy that we will continue to apply going forward.

We would also note that one result of the election was a continuation of the divided Congress -- in fact, the Congress became slightly more divided with this vote.  To the extent that a gridlocked government can function as a check to government spending, we believe that is a potential positive sign.  In fact, since the mid-term elections of 2010, government spending as a percentage of the economy has come down.  Should this trend continue, as we think it could, we would view that positively.

Finally, the enormous size, strength and innovative capacity of the American economy dwarfs the impact that politics can have on the system.  After all, we survived the 1970s!

*  At the time of publication, the principals of Taylor Frigon Capital Management owned securities issued by Intel (INTC).

Latest Taylor Frigon "Investment Climate" Commentary

Here is a link to the latest Investment Climate commentary from Taylor Frigon Capital Management, which we send out to our  clients each quarter.

As always, we emphasize the importance of taking a longer view amidst all the turmoil of  the varying economic and political events that are taking place around us -- and certainly right now is a period in which economic and political focus is reaching a fever pitch (especially in the US, with elections right around the corner).

We include above our long-term performance record for our Core Growth Strategy through the end of the most-recent quarter, to emphasize our conviction that taking the longer view of focusing on investing in good businesses (rather than trying to "time" geopolitical events) is a valid philosophy for investors.  Full performance data, along with Global Investment Performance Standards (GIPS) disclosures can be found here.