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A World of Paradoxes
4/1/2004
Consider the perversity of it all: today, our nation's most vexing public health problems arise from unlimited supplies of affordable food. This is not a problem any of our great-grandparents would have contemplated - they worried a great deal more about undernourishment, polio and tuberculosis. In fact, abundant food supplies (super-sized french-fries!) hits rich and poor alike so that obesity is now on track to become our worst self-inflicted medical problem.
That's just one example offered by Gregg Easterbrook in "The Progress Paradox: How Life Gets Better While People Feel Worse." Easterbrook, a fellow at the Brookings Institution and a journalist, strongly argues that nearly all aspects of our lives have improved by a meaningful margin in the past century, yet we often fail to appreciate such progress. In fact, he cites opinion polls to show that we are no happier today than our ancestors despite all this progress. Easterbrook details a laundry list of accomplishments enjoyed by the average American that, for a number of reasons, fail to attract headlines or deliver full satisfaction:
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Life expectancy for the average American has nearly doubled in the last century, from 41 to 77 years; major diseases such as polio and smallpox have been eradicated;
- Inflation-adjusted per-capita purchasing power has more than doubled since 1960 - we are much better off than our parents;
- 70% of us own our homes today, versus 20% a century ago, and nearly all of these larger dwellings have central heat and air conditioning;
- Car ownership and miles driven have exploded in recent decades yet smog, acid rain and pollution have declined; other environmental trends are positive as well;
- Education has increased substantially: soon, the U.S. will be the first society in history with more adults who are college graduates than are not. White-collar jobs now exceed blue-collar employment;
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The "jet set" is no longer exclusive: 70% of all Americans flew in 2002, and 25 million take overseas vacations nowadays;
The book's optimism is contagious, yet a doom-and-gloom mindset is nurtured by much of the media, and this clearly affects ongoing political and economic debates. The myopic, short-term views of the naysayers are especially troublesome to us at Harris Associates because we believe so strongly in a long-term perspective. Easterbrook has a number of theories to explain this societal pessimism, including: the media's myopic focus on disaster; the cultivation of "victimhood" by tort lawyers and politicians; "collapse anxiety" (fear that hard-won gains will end at any moment) and evolution (the paranoid survive best). In any case, Easterbrook assaults readers with good news and asks us to appreciate our much-improved circumstances.
...Which brings us to the current jobs debate! Frankly, we at Harris Associates try to avoid weighing in on such emotional macro issues for several reasons: 1) we don't spend a great deal of time analyzing such stuff (we view our company-specific work as substantially more productive for our clients); and 2) we're bound to upset some group of clients who feel a great deal more strongly about the issue than we do. But the topic grabs headlines each and every day, and the rhetoric - spurred on by the November election - seems to have reached epic proportions. It's gone so far, in fact, that even one of the most politically incorrect phrases of our time - "You're Fired!" - brings accolades to a boorish guy like Donald Trump. Talk about ironic!
In any case, the jobs debate represents an obvious paradox for the U.S. economy: while corporate earnings are now at record levels in the world's strongest economy, the U.S. job-creation machine sputters and anxieties rise. Outsourcing - to India and China, in particular - has become the chief villain in this drama. Lou Dobbs, from his perch at CNN, catalogues and berates the top corporate outsourcers each night, and the U.S. Senate drafts language to prohibit government from doing business with such firms. The debate sounds eerily reminiscent of the "Buy American" campaign of the 1980s. As anyone who has read a basic economics textbook can attest, however, nearly all episodes of trade protectionism - which is what such legislative efforts really constitute - lead to negative outcomes.
From our perspective, the "villain" in this story is really a hero: productivity. Worker output per hour has risen at a 4.5% rate the past two years, well above the 3% rate of the late 1990s. This improvement is a big deal: rising productivity is a key reason why the U.S. economy has grown at a faster rate than most other developed economies in recent years, as well as why the most recent recession was shallower than many predicted. Today's higher productivity is a direct result of the investments - in technology, equipment, work processes as well as worker training and education - corporations have made in recent years to improve their own operations. And in the context of Easterbrook's book, it's important to remember that high productivity is the key reason why living standards in the U.S. have never been better.
Furthermore, any discussion about productivity fits nicely with the concept of creating value, something about which our clients and we care deeply. At Harris Associates, we seek to invest in businesses where intrinsic value is likely to grow over time, and one of the important ways that can occur is for management to maximize the "productivity" of the firm's capital. We expect management teams to consider the whole range of options to "maximize" - buy better machines, invest in new technology, outsource, etc. - in order to deliver value to shareholders. In practice, this means searching for higher profitability through cost reduction and process improvement, as well as minimizing the amount of capital a company requires to operate. Many of the companies in our portfolio have, in fact, chosen the outsourcing route in recent years. And while that has clearly created difficult circumstances for those affected workers, the benefits to shareholders, users of the company's products (who enjoy lower prices) and taxpayers (who shoulder a smaller burden when corporate profits deliver higher taxes to the U.S. Treasury) are quite significant. Typically (hopefully!), improved corporate performance across the economy leads to new opportunities for those fired workers. As we see it, the current cycle is not meaningfully different from previous episodes: we empathize with those laid-off workers, yet we see no reason why job growth would not continue to improve in the coming months.
So, our investment philosophy recognizes outsourcing as one of many legitimate options a management team must consider in determining how to maximize productivity and, ultimately, value. The case against outsourcing is flimsy if one considers only the short-term costs without remembering that Americans are consumers and shareholders as well as workers. While many politicians have a difficult time finding the courage to address the issue in such terms, the facts strongly support our argument, particularly today when global competition is as fierce as ever.
We share much of the appreciation, optimism and long-term perspective espoused by Easterbrook and others who recognize the great progress our country has made. The U.S. has faced and successfully navigated similar circumstances before, particularly during the transition period from an agrarian to an industrial economy over a century ago. Now, we are in the midst of a transition to a service-oriented economy. Continued prosperity is, if history is any guide, likely but by no means assured. We recognize that legislative or regulatory outcomes that restrict the ability of companies to make reasonable decisions in order to maximize value will surely create a more challenging path to improving living standards. So it's important that reason prevails in the current debate with the doom-and-gloomers; the stakes are high. It would be tragically paradoxical if a misunderstanding of the magnitude and source of our prosperity led to an abandonment of its key features.
Edward S. Loeb
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