What is the role of the public sector in the private sector?

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Howard Marks, in one of his recent Oaktree Capital Memo’s, writes:

“…economics defines and constrains reality in business, investing and everyday life. Economics establishes the rules of the game and the boundaries of the playing field, and these things can’t be ignored. They can be altered, but not without consequences.

The realities of economics are stark and consistent, but also logical. They aren’t absolute, like the laws of physics (e.g., gravity), but they reliably establish tendencies and limits. If the price of something goes up, the amount consumed is likely to go down. If wages rise, the number of people employed for a task is likely to decline. If tax rates go up, there’s likely to come a point at which there’s less incentive to work, and thus less output. If a government spends more, to pay the bills it has to either print money (which tends to be inflationary), raise taxes or borrow.”

Marks goes on to discuss the importance of constraints and trade-offs, yet in politics, there are never trade-offs. A politician will say: “I will give you A” and leave out: “but you have to give up B.” They can promise to raise taxes on corporations to balance our budget, yet ignore potential consequences on job creation in the US. They promise to impose import tariffs to help US jobs yet leave out the probable increase in prices for things millions of Americans buy, like iPhones.

With this in mind, after setting the rules of the economic system and protecting those rules, I believe the role of government is to be honest about the “choices” and “trade-offs” (rather than ignore them and make false promises) and determine the best decisions for increasing the overall utility of the system. For example, free trade will hurt some US jobs, but it may have a positive benefit on the overall economy. There may be a couple million jobs lost, but there also may be goods that are drastically cheaper to 300 million individuals. The question for politicians is, if we believe the cheaper goods far outweigh the lost jobs, then is there something we can do to help those that lose jobs? Rather than punish the 300 million through import tariffs for the sake of significantly fewer people, maybe we can acknowledge the overall benefit of free trade and ask ourselves how we can compensate the few hurt by it.

This is only one example, therefore, are there other examples of the role of government in the economy?

Memo Below:

https://www.oaktreecapital.com/docs/default-source/memos/economic-reality.pdf?sfvrsn=6

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https://getpocket.com/explore/item/living-in-switzerland-ruined-me-for-america-and-its-lousy-

“My husband and I were so accustomed to American Reality that when he was offered an opportunity to work in Switzerland, we both thought about travel and adventure — not about improving our quality of life. It hadn’t occurred to us that we could improve our quality of life simply by moving.”

The linked article is a first person perspective of living and working in Switzerland relative to the United States. From the article, it appears there is a much greater work/life balance in Switzerland along with better overall results. Below are some basic statistics from the article:

  • Average Swiss citizen earned the equivalent of $91,574 in 2013 versys $55,708 for the average American worked (American worked worked 219 more hours on average)
  • Minimum allowed vacation in Switzerland is 4 weeks (many at 6 weeks).
  • Average Swiss citizen has double the net worth of an American citizen
  • Unemployment benefits of 70-80% of salary for 18 months relative to roughly 40-50% of salary for 6 months for US worker (excluding new 2009 legislation for some unemployed extending to 99 weeks).

I thought maybe they could provide more benefits because they tax more but the tax revenues as a percent of GDP are 29.4% in Switzerland versus 26.9% in the US. One interesting thing I found was their federal government only accounts for roughly 1/3 of their total government spending whereas it is around 2/3 in the US. Maybe they have been able to be more efficient with their spending being at the local level rather than federal.

Here are some of my thoughts and questions:

  • Are Swiss wages higher than the US because of their government policies?
  • Is Switzerland more efficient with their government spending?
  • What are some lessons the US could learn from Switzerland?
  • Did the article paint Switzerland better than it really is?

What do you all think?

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The government is often depicted as the enemy of innovation. At best, it can serve to regulate the private sector and at worst it actively inhibits it. This commonly held view ignores the role the government has played in driving entrepreneurship across some of the most cutting-edge industries.

In her book The Entrepreneurial State: Debunking Public vs. Private Sector Myths, Mariana Mazzucato walks the reader through countless examples of how the government has created a foundation for the private sector to thrive. For example, she closely details how the iPhone can find its roots in state developed technology. The iPhone is heavily reliant on the Internet – which is a variation of ARPANET, a program first funded by the Defense Advanced Research Project Agency (DARPA) in the 1960s. GPS began as a US military program called NAVASTAR in the 1970s. Touchscreen technology was developed by FingerWorks, a commercial company funded by the University of Delaware. SIRI is an evolution of an AI project at DARPA. Steve Jobs’ role in bringing the iPhone to market cannot be overlooked – but neither should the role of the State.

Another industry that has benefited immensely from government’s role is the green industry. Companies like Tesla, SolarCity, and SpaceX have benefited from government investments and regulation. For example, the Department of Energy has driven advancements in battery technology and NASA in rocket technology. Green firms have also benefited from government tax credits – both on the supply side when creating products and the demand side in the form of incentives for consumers to purchase green products. The government has enabled the creation of the green industry.

Finally, government has also taken on a larger role in the health industry. Since the ROI of creating a variation of an existing drug is much higher than investing in research to create a new blockbuster, private health companies are spending less on research and more on development. As these companies focus more on development, government agencies have picked up the research slack. For example, the National Institute of Health (NIH) supports provides funding for some ~325K researchers across Universities in the US. Congress recently passed the 21st Century Cures Act (CCA), providing over $6B in funding for the NIH for projects such as the Cancer Moonshot. The State rather than the private sector is expected to find the cures to diseases that have plagued the public.

The belief that the private sector can innovate despite the State overlooks the role the government has had in laying the foundation for the private sector to flourish. In the examples detailed above, the private sector can innovate because of the State, not despite it.

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