Lessons Learned, 2019

Trust the people. In America, a band of politicians, enraged that vulgar, unpredictable Donald Trump had bested their candidate, finally realized the wish they had announced on the day Trump was inaugurated, and impeached him. Then, looking upon what they had made and finding it not very good, they are considering “whether to recommend additional items of impeachment.” Outside the Beltway, people yawned, did not change their pre-impeachment view of the President for the better or the worse, and told politicians willing to listen that they care more about health care, prices of prescription drugs, jobs, income and the stuff that really matters in their daily lives.

In Britain, after a few years in which politicians and elites with so little faith in the people that they wanted to remain members of the European Union, out-sourcing the fate of the nation to unelected bureaucrats in Brussels, the Remainers were routed. They put up a long fight, but in the end the Brexiteers, led by a Phoenix-like Boris Johnson, prevailed. British voters, at last given the opportunity, made the decision that vexed the politicians for years: Brexit, and now! In America, voters will decide in ten months not whether they want Trump to lead the nation for another four years, but whether they prefer Trump, warts and all, to be their President rather than whomever the Democrats decide to offer up. On the day after the House voted to impeach, the already-high probability that Trump would win re-election rose, according to bookies’ postings.

Expansions do not die of old age, or automatically ignite inflation. Thanks to a Federal Reserve Board chairman willing to learn, this time around the Fed refused to murder the eleven-year expansion by raising interest rates. Solid growth, a booming jobs market and record-low unemployment did not trigger inflation. Even with the government running an eye-watering deficit. At least not immediately, or even soon. The Fed learned that it can contribute to steady economic growth by announcing that it will stay its hand for a good long while, which it has done.

Free trade is not always in a country’s best interests. For one thing, there are winners and losers, and the losers can least afford to take the pain of competition from low-wage workers in foreign countries. Their resentment at their condition, combined with the outsize gains of the winners, produced an inequality that threatens support for market capitalism. For another, as Adam Smith pointed out, when faced with a trading partner — think China — using predatory tactics such as theft of intellectual property, subsidies to industries of the future, and bars to competition in its home markets, something must be done. Until Donald Trump, protectionist and self-styled Tariff Man came along, obtuse politicians allowed China to have its way with America, decimating our industries and towns. No longer. The export-dependent Chinese economy is weaker, the communist government in the throes of massive bank bailouts, corporate defaults are at a record high. America’s economy, less dependent on exports, is stronger, in part due to better regulation of its banks. Trump learned that when it comes to trade, nice guys finish last, as Brooklyn Dodger manager Leo Durocher is believed to have said.

Could the President’s tactics have been more delicate, more appealing to our allies? Yes, but note EU’s imports from China’s are up, not exactly a show of solidarity with its American ally. Is doing something about China’s trade policy better than doing nothing? Also yes.

Competition policy matters. This lesson became unlearned when the so-called Chicago School seized the commanding heights of policy-making, taught that consumer welfare is paramount, that price cuts are at all times and everywhere good, and that predatory tactics of firms with substantial market power should be ignored, especially in markets where the service is “free”. But just as there is no “free lunch”, there is no free service. “Nothing’s free” says Makan Delrahim, head of the antitrust division of the Department of Justice. We pay with our data and with our privacy.

The Chicago-School policy permitted Facebook to acquire real and potential competitors, Google to leverage its powerful search engine to capture apps markets from more efficient competitors. Lesson learned. Newly alert regulators are imbued with the old-time trust-busting religion that was good enough to rein in John D. Rockefeller, J.P. Morgan and E.H. Harriman over 100 years ago. Law suits to follow.

Profits matter. “The world has changed in a year,” Herman Chan, a San Francisco estate agent, moaned to the press as a spate of Initial Public Offerings (IPOs) failed to produce the billionaires needed to absorb the new multi-million-dollar apartments coming on the city’s property market. Techies who accepted shares in start-ups as compensation for their work, confident that they would soon join the billionaires’ club, are reduced to chanting Cole Porter’s “Who Wants To Be A Millionaire”, a tune in which working stiffs (Frank Sinatra and Celeste Holm in “High Society”) try without success to convince themselves they have no use for yachts, caviar, fancy foreign cars and country estates.

IPOs might have done well for employees who immediately sold their shares if permitted to do so. Those who held on to Lyft, Uber, Pinterest, or Slack after their IPO earlier this year, along with new investors, have watched prices drop about 42%, 26%, 26% and 45% in value, respectively. It seems that investors shifted emphasis from profitless growth to profits, of which these companies had none.

Amazon used the capital provided by early shareholders to erect an infrastructure that makes it difficult for competitors to enter: a $1,000 share purchase at the 1997 IPO is worth about $1,400,000 today. We learned that is harder to do when you are selling rides (Lyft, Uber), or access to recipes (Pinterest), or subscriptions to a system that replaces ordinary email and text messaging (Slack). Of course, there are successful IPOs: Renaissance Capital, a fund tracking newly listed companies, is up 30% this year. The lesson that investors have learned is to look for actual profits or at least a clear path to the day when black ink replaces red (over $5 bn for Uber in the last quarter).

Everyone will have his or her own list of lessons learned this year. And in the coming year we will learn a few that we will wish we had learned this year. Meanwhile, many thanks to those who have followed these pieces in the year now about to end, and best wishes for a wonderful, exciting 2020.