What this covers
Howard Marks, joined by Warren Buffett and Niall Ferguson, examines how government attempts to override economic laws—through price caps, tariffs, and deficit spending—consistently backfire despite good intentions. The argument unfolds through concrete cases: rent control that discourages construction and reduces housing supply; California's wildfire insurance caps that drove insurers out of the market; and tariffs that protect some domestic producers while raising consumer costs and failing to reverse structural economic shifts. Beneath these examples lies a single mechanism: governments can suppress prices but cannot compel suppliers to offer goods and services at those prices, so intervention produces shortages, harm to would-be consumers, and worse overall welfare than freely functioning markets.
The conversation ranges across three dimensions of policy failure. First, it traces immediate damage: rent control creates immobile tenants and crumbling housing stock; insurance caps leave thousands uninsured during disasters; tariffs function as hidden taxes on consumers. Second, it addresses the claim that tariffs could restore US manufacturing, arguing that the decline from 30% of non-farm employment in 1950 to 8% today reflects a universal pattern of economic development, not unfair trade, and that hundreds of thousands of manufacturing jobs remain unfilled. Third, it confronts long-term fiscal arithmetic: the US has run deficits in 41 of the last 45 years, Social Security trust funds face exhaustion by 2035, and interest costs already exceed defense spending. Marks argues these outcomes stem from ignoring economic constraints for political convenience—both parties avoid unpopular reforms like raising the retirement age or means-testing benefits. Ferguson and Buffett affirm the unsustainability of current trajectories, though they stop short of predicting when the breaking point arrives.
Marks argues that governments can suppress prices (rents, insurance premiums, imports via tariffs) but cannot compel supply at those prices, so attempts to override the laws of economics consistently create losers, shortages, and worse aggregate welfare than freely functioning markets would.
- Rent control and California fire insurance caps both produced supply withdrawal and harm despite well-meaning intent
- Tariffs protect domestic producers but at the expense of consumers and global welfare, and cannot reverse the structural shift away from manufacturing
- US fiscal deficits and Social Security insolvency are foreseeable consequences of ignoring economic constraints for political convenience
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Keynesian theory prescribed deficit spending only to stimulate a slow economy, with surpluses and debt paydown during prosperity; modern US politicians of both parties have kept the deficit spending while forgetting the surplus-and-paydown half, running a $1.8 trillion deficit (6.4% of GDP) in fiscal 2024 during prosperity.
“the government should run a surplus, spending less than it takes in and pay down the debt. Today, US politicians from both parties are in the habit of spending without regard to the deficit. And the part about surpluses and payowns has been forgotten.”
California regulators forced insurers to price wildfire risk using 20-year historical average losses rather than forward-looking catastrophe models, and prevented them from passing through higher reinsurance costs; as wildfires grew more frequent and severe, historical data became a poor predictor and insurers could not price to actual risk, leading major insurers to withdraw.
“Insurers were prohibited from using forward-looking catastrophe models to set rates for wildfire risk. Instead, they were required by law to base their rates on historical average losses over the previous 20 years.”
Highly unequal wages and prices (disequilibria) cannot persist when labor and goods are mobile; trade and migration drive wages and prices toward equilibrium across countries, which is the mechanism trade harnesses and tariffs impede.
“Highly unequal wages and prices, Examples of what economists call disequilibria can't persist if things like labor and goods are mobile. That's trade at work.”
If a $5 million house has a 1% annual probability of burning down, the insurer faces an expected payout of $50,000, so capping the premium at $25,000 simply means the policy won't be written — you can limit the price insurers can charge but you can't make them provide coverage at that price.
“you can limit the price insurers can charge for coverage, but you can't make them provide coverage at that price.”
Social Security was designed as a pay-as-you-go program where current workers' taxes fund current retirees' benefits; because the worker-to-retiree ratio has fallen and retirees live longer without workers paying taxes longer, incoming revenues now fall short of benefits, the trust funds are being drawn down, and are projected to be exhausted in 2035, after which receipts would cover only 79% of promised benefits absent corrective action.
“you can estimate with some confidence the year when in the absence of corrective action, the trust funds will be exhausted. That year is 2035.”
Rent control creates winners (existing tenants, incumbent politicians) and losers (landlords, developers, would-be renters); it discourages maintenance and new construction, reduces mobility because tenants can't monetize their below-market asset, and ultimately leaves the housing stock failing to meet community needs in both condition and quantity.
“governments can limit the rents landlords can charge for their apartments, but they can't make developers build new ones.”
Protectionism via tariffs reduces import competition, which helps domestic manufacturers and workers but tends to raise prices, allows production of inferior goods, enables strong unions and high wages that further raise costs, makes consumers pay more, and can reduce exports as domestic producers become globally uncompetitive.
“consumers pay more than they would if imports were unconstrained, and the volume of exports may actually decline since domestic producers might become globally uncompetitive.”
Social Security insolvency could be solved through known options—raising the tax rate, raising the earnings cap ($176,100), raising the retirement age, shrinking benefits, reducing COLA, or means-testing—but all are wildly unpopular with voters, so both parties agree to 'hands off Social Security' and have not dealt with it in over a decade.
“The problem is that all the above would be wildly unpopular with voters. It's assumably for that reason that the two political parties have one thing they agree on. Hands off social security.”
The decline of US manufacturing employment (from ~30% of non-farm jobs in 1950 to ~8% today) reflects a universal developmental pattern—economies peaking near $40,000 per-capita GDP then shifting from manufacturing to services—rather than unfair foreign trade practices, evidenced by ~400,000 unfilled US manufacturing job openings.
“Every single economy that industrialized... reached a peak at some point along the way, roughly when the per capita GDP reached $40,000... after which manufacturing as a share of employment declined.”
If the US continues to borrow and add to national debt faster than GDP grows, the interest bill at a constant rate will consume an ever-larger share of the budget, compounding deficits and debt; the US already spends more on interest annually than on defense, and the burden will soar if rates rise as low-rate debt matures and must be refinanced.
“We already spend more on interest each year than on defense.”
Optimizing overall welfare is distinct from ensuring all individuals prosper; the better approach is to let markets operate freely and address undesirable side effects (safety nets, retraining, anti-competitive enforcement) rather than to mandate universal prosperity, because efforts to control markets—from the Soviet Union to California wildfire insurance—make things much worse.
“The much better way is for governments to allow markets to operate freely and deal with undesirable side effects.”
Wealthy boomers like the author should not receive Social Security benefits; the failure to means-test and to fix the program reflects a serious generational equity issue, as the costs of both Social Security insolvency and the national debt are being deferred onto future descendants.
“I and other wealthy boomers shouldn't get social security benefits.”
US automakers lost ground to imports primarily because American cars were more expensive than foreign cars but not correspondingly better, driven by higher wages and a unique fringe benefit package including lifetime medical care amounting to $1,900 per car by 2008.
“consumers concluded that cars made in the US were more expensive than foreign cars, but not correspondingly better.”
Baby boomers (born 1946-1964) are unusually numerous, disproportionately affluent, and above average in voting propensity, casting 38% of votes in the 2020 presidential election, giving them outsized political influence that deters politicians from reforming Social Security.
“having cast 38% of the votes in the 2020 presidential election. All the boomers are in or near retirement and no politician wants to antagonize them.”
Targeted tariffs can be legitimately justified for national security (e.g., not depending on potential antagonists for defense materials), protecting iconic national-identity industries, or countering unfair trade practices like subsidies and market-access denial — but this is fundamentally different from taxing all goods from all countries.
“The argument we heard before the so-called liberation day was for targeted tariffs that would be applied selectively to accomplish these goals. But that's different from taxing all goods from all countries.”
The US government has run fiscal deficits in 41 of the last 45 years and trillion-dollar-plus deficits in all of the last five, able to do so only because the world has extended it virtually unlimited credit at low interest rates — a privilege that cannot be assumed to last forever.
“The result has been fiscal deficits in 41 of the last 45 years and trillion dollar plus deficits in all of the last five.”
A tariff is fundamentally a tax on imported goods; the exporter or importer may absorb some of it to maintain market share, but otherwise it is paid by the end consumer in the form of a price increase.
“In other words, it's a tax. The exporting company, the exporting country, or the importing company might choose to pay some or all of the tariff... Otherwise, the tariff will be paid by the end consumer in the form of a price increase.”
DOGE's spending-cut effort under Trump and Musk fell from projected savings of $2 trillion to $1 trillion to ultimately the low hundreds of billions at most—a relatively immaterial amount—while the House passed a bill extending 2017 tax cuts that the nonpartisan CBO estimates will add $2.4 trillion to the deficit over ten years, showing neither party is meaningfully tackling the deficit.
“the potential savings went from $2 trillion to $1 trillion and ended up in the low hundreds of billions of dollars at most, which is a relatively immaterial amount.”
There is no world in which tariff policies could lead to the reindustrialization of the United States because manufacturing is far more expensive to do in the US than almost anywhere else, and the country cannot return socially or economically to the 1950s.
“There is not a world in which these policies could lead to the reindustrialization of the United States because it is way more expensive to do manufacturing in this country than it is to do it practically anywhere else.”
When allowed to function, the laws of economics provide incentives that encourage innovation, productivity, and efficiency, creating prosperity and optimizing overall welfare—for example, globalization delivers comparative-advantage benefits so consumers everywhere get the best quality-price combination and producing-nation workers get the highest possible pay.
“globalization delivers the benefits of comparative advantage under which each country produces the things it can make better and cheaper.”
By the time of the 2025 fires, fewer than a quarter of affected properties were insured against fire, with State Farm non-renewing over 70,000 policies in 2024 and some premiums rising from $4,500 to $18,000, demonstrating that capping insurance prices deprived thousands of access to coverage.
“By the time of the 2025 fires, fewer than a quarter of affected properties were insured against fire.”
The current US fiscal deficit is unsustainable over the long run; though no one can say whether the breaking point is 2 or 20 years away, it is something that cannot go on forever and that tends to become uncontrollable at a certain point.
“we're operating at a fiscal deficit now that is unsustainable over a very long period of time... this is something that can't go on forever, and it has the aspect to it that it gets uncontrollable at a certain point.”
International trade is not a ripoff in itself but a fair trade, since the exporting country gets the money and the importing country gets goods it desires; the trade deficit in goods ($1.2 trillion in 2024) overlooks the US's $290 billion positive trade balance in services.
“It's literally a fair trade since the exporting country gets the money and the importing country gets the goods it desires.”
Because the US is bigger and richer than most other countries, it is inescapable that it will buy more from them than they buy from it, so a goods trade deficit is largely structural rather than evidence of being cheated.
“given that the US is bigger and richer than most other countries, isn't it inescapable that we'll buy more from other countries than they'll buy from us?”
Economies are organic entities that operate on their own pursuant to underlying laws like supply and demand and incentives, which are part of human nature and don't require a PhD to understand.
“I described economies as organic entities that operate on their own pursuant to some underlying laws. The best known is the law of supply and demand.”
Governments choosing winners and losers is fundamentally objectionable because it treats some parties unfairly even while claiming to produce fairness, and it interferes with the movement of resources to their most productive uses.
“governments are choosing winners and losers rather than letting market forces do so.”
The behavior of Washington regarding both the fiscal deficit and Social Security resembles a man who jumped off a 20-story building saying 'so far so good' as he passed the 10th floor — postponing acknowledgment of an inevitable crash.
“remind me of the tale of the guy who jumped off the 20story building. As he passed the 10th floor, he said, So far so good.”
California's strong Democratic supermajority means elected officials face little Republican opposition and therefore don't have to moderate their interventionist economic behavior to pass legislation or retain seats.
“because the Democrats hold a supermajority in the state legislature and have little fear of potential Republican opponents, Democratic elected officials don't have to moderate their behavior”
The regulatory approval process for insurance rate changes in California became slower, with average approval time rising from 157 days (2013-2019) to 293 days (2020-2022), contributing to insurer frustration and market instability.
“the average time for approval rising from 157 days 2013 to 2019 to 293 days 2020 to 2022.”
In 2024, half of the 16 million vehicles sold in the US were imports (including 500,000 Volkswagens), compared with imports representing only 0.03% of US cars sold in 1949.
“in 2024... half the 16 million vehicles sold in the US were imports, and they included 500,000 Volkswagens.”
This is the memo by Howard Marks; thank you for listening, subscribe wherever you listen to podcasts.
“Thank you for listening to The Memo by Howard Marx.”