Nathan Kowalski

Voting on policies rather than politics

  • Debt burden:

Politics are emotional. Some of us wish it were more rational and subject to an almost scientific rigour when it comes to assessments and criticism. We have a tendency to respond better to a great narrative rather than factual components.

Sadly, many strong feelings on certain issues do not necessarily develop from a deep understanding of them. Globally we have begun to see a movement where protests and social revolt has captured a growing share of political outcomes. There are many reasons for more populist uprising and shifts in political sentiments — some are very legitimate and grounded. The problem and difficulty with emotionally driven decisions is that they become increasingly polarised and deflective of serious contemplation.

First off, it seems to be an almost natural desire for people to assign blame and consequence for all matters to the government of the day. Pinning economic outcomes to one political party or another is difficult and ultimately a false premise. The economy, especially the global economy, is much larger in its own influence than any government.

Although governments clear fields to plant economic opportunities, they are not the creator or grower — the collective farmers are businesses and consumers. They cannot take sole credit for the good or bad in the economy.

Most people mine data and use a small sample size for all sorts of statistics — this is dangerous.

It is no different when trying to assess political performance. The thought being that we just need to show how GDP or employment developed while party “X” was in power — this proves they are good or bad. Unfortunately, it is not even close to being that simple and this is a dangerous assumption.

Not only would there naturally be time lags associated with any policy but probably much larger other non-political effects would make any correlation spurious. The sheer small sample size should also lead people to question whether they are suffering from the “law of small numbers”.

What worries me immensely is the level of general awareness. For some things in life it doesn’t matter that you don’t know how they work. You pick up your phone and you have no idea how it transmits the text message ... but that’s OK. Not knowing this and picking a phone doesn’t really matter in the grand scheme of things.

When it comes to politics and government policies, however, not knowing is very bad. If you don’t understand policies or even try to but vote blindly on narratives or party lines, then you are doing your country a disservice and may actually cause irrefutable harm.

Maybe one of the best stories about this involved the Brexit vote. The day after the majority voted to leave the European Union the number one Google search was: “What is the European Union?” If politicians spent less time pontificating and more time discussing political policies and their implications, we would all shortly realise how little we all know and would be more open to moderating our own views.

When it comes to voting based on the economy, I worry that most people have limited idea of how it works or what is most important. Thus throwing out good/bad stats is actually a distraction and can be grossly misleading. The why and how is critically important in these aspects — not the simple good and bad based on a time series.

It is more important, and ultimately true, to admit we actually don’t know exactly why something happened and that we can’t attribute something in the economic sphere solely to political parties. As mentioned above, tying economic stats of certain time periods with certain parties is very popular but ultimately, in my opinion, disingenuous given there are much larger factors in play.

This is not to say that judging a party on its proposed economic policies is worthless, it is not. In fact, future policies should be given more weight than the past for the simple reason that when you vote you are voting for the future not the past. Strong political leadership can help an economy in the short term by improving consumer and investor sentiment, but this has to be followed up with sound fiscal policies.

Another philosophical aspect to consider is a concept from Howard Marks, famed investor from Oaktree Capital Group. He often states that “you need to be right and non-consensus” to get an outsize investment gain.

There is a similar analogy for politics in general. A lot of great policies will not be popular but will be right. These, ironically, will be the most effective. Policies that everyone loves and are part of normality tend to just perpetuate existing problems and often are wrong in terms of solving the big issues.

Solutions for big issues often require non-consensus options that are rationally sound. Politics, unfortunately, and the nature of election cycles, often makes these practically impossible to implement. True leaders need to possess the courage and the conviction to win by losing. This is why the first 100 days or early in the formation of a new government that the “tough” policy choices need to be implemented. Assuming they are right …

My concerns for Bermuda have not changed. In fact the “Bermuda’s 4Ds” remain areas for political policy focus.

Diversity: If we are going to debate the economy we should factor in our level of diversification. If a few large reinsurers account for nearly 16 per cent of our economy and we lack any meaningful exposure in industries which are clearly, at least in the medium term, leaders for future growth, we need to be aware of this.

I am not saying Bermuda is not doing anything in regards to this because we are and various quangos are doing an excellent job of getting this started. I think, however, that we need consider “non-consensus” things that are prudent.

Taking the analogy above, some of the best ideas for diversifying Bermuda will be seen as a joke. They may, however, lead to the best results. It is comforting and intellectually easy to look around your immediate surrounding and foster a culture of protection for what you have and a mindset of growing what you know.

Unfortunately bending over backwards to defend and foster a buggy-whip industry will not lead to greatness. Sectors or industries should evolve and stand on their own while new and truly diverse streams of business should be enticed or their environment enhanced.

When it comes to future growth, if someone scoffs at your idea, it’s probably worth looking further into. Furthermore, true competitive advantage results from excellent products and services that are delivered faster, cheaper or better and their longer-term permanence does not hinge on regulatory or tax arbitrage.

Demographics: If both parties do not have a clear plan on immigration with at least general overarching specifics then we are in trouble. When the census is finally released, it will not be shocking to me to see that Bermuda’s “permanent population” is likely to be down to about 61,000 souls. This obviously has serious ramifications for the local economy in terms of the level of aggregate demand and for Bermuda to solve its denominator problem.

The denominator problem is simple: fewer and fewer people are paying more and more. The amount of debt being shouldered per person in the workforce is expanding exponentially as well as the country’s soaring entitlements structure and healthcare burden. Any policies encouraging the creation of immigration for non-competing jobs and/or new industries needs to be a priority.

Debt: “Pay go” needs to be the policy. If you want to give someone money or build something, you need to find a way to cut something or raise taxes to pay for it. Our debt is still a problem, as we spend more on debt interest payments than our entire public-school system.

Giving open-ended spending ideas without corresponding expense cuts and/or additional tax policies is one-sided and not very comforting. Taxes need to not be levied on international business and/or local business. In fact, any further revenue schemes that foster an increasing burden on the business sector, including labour, would be extremely detrimental to future economic growth. The debt cannot be tackled at the expense of the economy.

Divergence: Inequality is not just a story here. It is very real. Both political parties know this. One reason is the limited scope of taxation and somewhat protectionist policies — think 60:40. At present, we continue to punish local employers to some degree by raising the cost of what we need in Bermuda — labour.

A general service tax would also hammer local service providers and escalate inflation. The latest consumer price index report shows what happens when you tax something — it soars in price — fuel was up over 19 per cent!

It’s time we had a serious look at real estate. This is hugely controversial but there are some ways to not affect middle-class single homeowners in Bermuda. Since land is highly correlated with wealth, if we make this even more progressive in nature, the burden will fall more on those with the ability to pay.

Keep this in mind, as intellectual capital is mobile and so are financial assets. Real estate is the second biggest component of GDP — about 17 per cent — yet we somehow have avoided really analysing this and possible ways to modify taxation.

Tuesday will be interesting to say the least. I hope voters try to focus on policies and not politics.

The winner will take it 19 to 17.

• Nathan Kowalski CPA, CA, CFA, CIM is the chief financial officer of Anchor Investment Management Ltd. and the views expressed are his own.

Disclaimer: This material is not intended to be relied upon as a forecast, research or investment advice, and is not a recommendation, offer or solicitation to buy or sell any securities or to adopt any investment strategy. The opinions expressed may change as subsequent conditions vary. The information and opinions contained in this material are derived from proprietary and non-proprietary sources deemed by the author to be reliable, are not necessarily all-inclusive and are not guaranteed as to accuracy. Past performance is no guarantee of future results. There is no guarantee that any forecasts made will come to pass. Reliance upon information in this material is at the sole discretion of the reader. Investment involves risks. Readers should consult their financial advisers prior to any investment decision. Index performance is shown for illustrative purposes only. You cannot invest directly in an index

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