Productivity and Prosperity

Amidst the backdrop of extreme partisanship in this year’s presidential primary–and prevailing negative talking points on the state of the union–Berkshire Hathaway’s 2015 letter to shareholdersoffered a more optimistic take on America’s future.  Berkshire’s 85 year old CEO, Warren Buffett, reflected on the growth in living standards during his lifetime:

“American GDP per capita is now about $56,000. As I mentioned last year that – in real terms – is a staggering six times the amount in 1930, the year I was born, a leap far beyond the wildest dreams of my parents or their contemporaries. . . All families in my upper middle-class neighborhood regularly enjoy a living standard better than that achieved by John D. Rockefeller Sr. at the time of my birth. His unparalleled fortune couldn’t buy what we now take for granted, whether the field is – to name just a few – transportation, entertainment, communication or medical services.”

Driving the point home, Buffett described several examples of productivity increases which enabled this leap in prosperity.  For example, in America’s agricultural sector:

“In 1900, America’s civilian work force numbered 28 million. Of these, 11 million, a staggering 40% of the total, worked in farming. The leading crop then, as now, was corn. About 90 million acres were devoted to its production and the yield per acre was 30 bushels, for a total output of 2.7 billion bushels annually.

Then came the tractor and one innovation after another that revolutionized such keys to farm productivity as planting, harvesting, irrigation, fertilization and seed quality. Today, we devote about 85 million acres to corn. Productivity, however, has improved yields to more than 150 bushels per acre, for an annual output of 13-14 billion bushels. Farmers have made similar gains with other products.

Increased yields, though, are only half the story: The huge increases in physical output have been accompanied by a dramatic reduction in the number of farm laborers (“human input”). Today about three million people work on farms, a tiny 2% of our 158-million-person work force. Thus, improved farming methods have allowed tens of millions of present-day workers to utilize their time and talents in other endeavors, a reallocation of human resources that enables Americans of today to enjoy huge quantities of non-farm goods and services they would otherwise lack.”

The underlying theme of Buffett’s commentary is that economic growth, while uneven and frequently disruptive to the status quo, ultimately benefits society in aggregate.  Even small annual increases in real GDP compound to significantly higher living standards over the course of a generation.  The challenge (and incidentally, the root of today’s heated discourse from both ends of the political spectrum) is deciding how to fairly apportion the benefits of economic growth, such that we continue stimulating innovation without casting aside workers whose skill sets have not evolved as quickly as the marketplace.

The Resource Curse
In several prior commentaries, we touched on the recent dramatic drop in crude oil prices, down more than 75% from peak-to-trough.  While the oil supply glut was precipitated by a swift increase in U.S. shale production over the last decade, the real inflection point in pricing came in late 2014, when Saudi Arabia—the largest global producer, and one which has historically reigned in supply during periods of price weakness—signaled that it was no longer willing to curtail production, and would instead focus on maintaining its global market share.  This represented a significant U-turn to over 50 years of established OPEC policy, and spooked a number of traders who no longer took for granted an implied “support level” for oil prices.

Nearly two years later, however, Saudi Arabia’s efforts to hold the line on production are showing signs of strain.  As detailed in this Planet Money podcast, “The Kingdom” is heavily reliant on oil revenues to fund generous social programs and a public employment sector which accounts for approximately 70% of the total workforce. In 2015, Saudi Arabia was forced to draw down significantly on its accumulated foreign currency reserves to fund a budget deficit.  At current oil prices, this trend will continue unless austerity measures are implemented (those interested in a deeper dive on this topic might enjoy this Brookings Institute article).  This likely explains why Saudi Arabia held talks last month with Russia (the second-largest global producer) about potentially “freezing” their respective production at January levels.  Importantly, Bloomberg noted that this was “the first significant cooperation between OPEC and non-OPEC producers in 15 years.”

Social Security Taxation
By the time they’ve reached retirement, most of our clients have several distinct “buckets” of assets to draw from in meeting their income needs.  Determining the sequence of withdrawals from these various sources is an important part of the planning process, and a core consideration of this retirement “road map” is optimizing tax efficiency.   As part of a broader series of reports on ways to optimize taxes on investments, Morningstar published a helpful article explaining when and to what extent a retiree’s social security benefits are subject to federal income taxes.  Understanding these rules can help inform other planning decisions, such as when to begin withdrawing IRA assets, or whether to pursue a Roth IRA conversion.

Life Insurance Buyer’s Guide
The New York Times recently published a helpful primer on life insurance, which cuts through much of the industry jargon and lays out the important questions to answer when determining your appropriate level and type of coverage.  This article is recommended reading for anyone with dependents, and even those who already carry life insurance may find it helpful in evaluating whether their current type and level of coverage is still consistent with their needs.