Tuesday Night Links

• Few of today’s populists bemoan the declining reliance on agriculture jobs, but the phenomenon is the same as what’s seen in manufacturing. In both cases, people can produce more than in the past with less workers. Blame technology, not trade—and don’t fall for the populist nostalgia trap. It also turns out that those service jobs were not lower paying jobs, and that manufacturing jobs, in general, didn’t reliably provide higher income. (Even when they did pay more, they didn’t pay much more.) [Cato Institute]
• If you’re going to try and mount an intellectual defense of Trump’s tariff policies — instead of just screaming out memes, pointing fingers, and trying to distract people by talking about immigration instead — this is basically how you have to do it. Nothing good is coming of Trump’s tariffs right now, so if you’re going to defend them, you basically have to argue that they represent short term pain for long term gain. In this case, the long-term “gain” is economic self-sufficiency and a bonanza of factory jobs. Formally speaking, you can’t prove that this is wrong, except by waiting a bunch of years and then observing that reindustrialization didn’t happen. There are no hard and fast economic laws of the Universe; we have a lot of theories, but economies are complex beasts, and the past is an imperfect guide to the future. I can’t completely rule out the possibility that Trump’s tariffs will cause a vast crop of steel factories and shoe factories and semiconductor factories to spring up from the American topsoil like mushrooms after the rain. And yet when we look at what’s actually happening to American manufacturing in real time, it doesn’t look anything at all like the beginning of the reindustrialization that Cass imagines. [Noah Smith]
• Economists that seriously study the issue generally find that falling manufacturing employment doesn’t have much to do with corporate management, and surprisingly, it doesn’t even have that much to do with trade (although a few dissent on this latter point). Instead, 80% - 90% of the decline can be traced to higher manufacturing productivity combined with stagnant demand, the same thing that reduced employment in agriculture in a previous generation. This is why the decline in manufacturing employment dates all the way back to WWII: greater manufacturing efficiency generally translates to lower manufacturing employment, because there is some upper limit on the number of cars and light bulbs we want to consume. We take the dividends from more efficient manufacturing and redeploy it to deliver services, especially in education and health care. [MD&A]
  
• When you invest in a company, you are really buying two assets: Their current business, and the unique knowledge they have about adjacent businesses, which they can monetize by investing the firm’s capital. […] One reason successful investors emphasize the quality of the management team, particularly among growth companies and companies in fast changing markets, is that their ability to allocate capital and win in other fields is crucial to the outcome of an investment. A DCF of an existing business is inadequate to analyze the outcome in a fast changing field where yesterday’s assets are becoming obsolete, but the leading players have a huge head start on building the more durable assets of tomorrow. [MD&A]
• Zell realized that his replacement cost framework would apply to all long-lived capital investments, not just real estate. In the mid-1980s, his firm bought a fleet of railcars, which were then trading at half of replacement cost, following a construction boom a few years before. Same model, same bet, same result. In 1992 he flipped his railcar fleet to GE for a huge profit. This is not to say that Zell’s fortune can be entirely attributed to simply buying quality assets trading at a discount to replacement cost. Zell was a savvy operator and a talented dealmaker who boosted his returns through leverage and clever structuring. But at the same time, throughout his career, this was Zell’s big shtick: “to look for opportunities in places where others were ignoring the rules of supply and demand”. [MD&A]
• I would conclude that successful startups end up getting into venture investing because their early success and the economics of their industry creates a unique set of incentives whereby it just so happens they will sometimes achieve the best outcome by investing in companies that build complements. It cannot be overlooked also that early success allows a startup to raise a lot of cash, which makes it easier to get into a venture strategy. It certainly does not imply that most startups would be more successful if they started a venture capital arm. Indeed, this strategy mostly compounds the advantages of startups that are very successful in the first place, but we would not expect it to turn a struggling startup into a market leader. [MD&A]