It is that time again: Presidential election season. While we do not talk politics at Iron Capital, we do talk economic policy and how it might impact our clients and their portfolios.
This year’s comparison reminds me of a story. My wife, Frost, is a wonderful wife and what I would call a “modern” mother. She does the majority of our grocery shopping, and because she is a modern mother, our house does not contain any items with high-fructose corn syrup, or any non-whole grain breads, etc. Something like Pop-Tarts as standard fare is a nope.
Then one year when the kids were younger, I took one for the team on our family beach trip and went to the grocery store while Frost took the kids straight to the pool. This was the summer my kids were introduced to Pop-Tarts. Needless to say, they wished that Dad would do the shopping from that moment on.
Pop-Tarts are a delicious treat, and that is really all our kids needed to know. Of course, as parents we understand that Pop-Tarts are junk. They still don’t make it into our house on a regular basis, but since that year they have become a beach vacation tradition. If we let our kids eat Pop-Tarts all day every day, they would be a mess – overweight and irritable with very low energy from the perpetual sugar crash.
What does this have to do with economic policy? Everything. 2024 is the year of so-called populist policy suggestions. This means they are popular among people who know as much about economics as our Pop-Tart loving children knew about nutrition.
Trigger warning: I am about to destroy one proposal from your favorite presidential candidate, and I don’t need to know who that is because both parties have abandoned economic reason this year. If you are sensitive to inconvenient facts, please skip.
Perhaps the most common example is a favorite of Donald Trump’s: Tariffs on imported goods. Tariffs are a favorite because they sound so wonderful. “Tariffs on foreign steel will help protect domestic steel workers.” But, at what cost? Yes, they protect that one group, but what about the stevedores who unload ships full of foreign steel? What about others in the transportation business? What about the consumer who then has to pay more for anything made with steel? What about the auto worker who loses his job because the car he makes costs more, so consumers buy fewer of them?
What about the safety when manufacturers find other, less sturdy substances to replace the steel that was in their products? Seem far-fetched? Well, do you know why there is high-fructose corn syrup in those Pop-Tarts? Because sugar is too expensive in the U.S. Why is sugar more expensive here? Because there are sugar farmers in Louisiana who can’t compete with sugar cane grown elsewhere, so the U.S. government for years has placed tariffs and quotas on sugar from foreign sources.
With the high price of sugar, food companies found alternatives, and now my children are only rarely allowed to have Pop-Tarts and have to travel internationally to taste what a Coke is supposed to taste like. Tariffs hurt far more people than they help, but like many populist economic policies, the people who are helped are obvious while all those who end up getting hurt are far less so. Just because it is not obvious doesn’t mean the pain is any less.
To make sure we make all of our readers mad, let’s discuss Kamala Harris’ price gouging grocery store owners. This is another old favorite of the populists: price controls. On the surface it sounds great – the government will just step in and tell grocers they can’t charge more than X for a gallon of milk. It sounded great in the early 1970s when Richard Nixon thought it a wonderful idea. “We will show those oil cartels, we will put a cap on the price of gasoline.” Then, I had to ride along to the gas station with my sister in case she ran out of gas while waiting in the long line so someone would be there to push the car the rest of the way. (We had some of our best sibling arguments on those trips, by the way.)
Price controls create shortages. To understand why, one needs to understand the law of supply and demand: The higher the price a supplier can sell her product for, the more of that product she is willing to make, and the lower the price, the less she is willing to supply. However, the consumer has the opposite incentive: The lower the price the more he will buy, and the higher the price the less he will demand. Price discovery is a process of finding the right price that matches the supply with the demand, creating a win-win situation in which the supplier and buyer get a price each of them is happy with.
When that process is skewed by outside forces, disconnects happen. When the government artificially holds prices down, consumers will continue to demand high quantities but suppliers will not want to supply more, and eventually will simply not be able to supply more. This ultimately brought down the Soviet Union as the bread lines got to the point where there was no bread for anyone. We see the same pain today in Venezuela, and those of us who can remember the 1970s saw it firsthand. Price controls lead to shortages and rationing.
I use just two examples, but there are more, and I’ll explain what they are and why they are awful in future weeks. In case you think I protest too much, this is being noticed elsewhere. The Wall Street Journal published an op-ed on August 20, “The Era of Good Economic Policy is Over.” Two days later their columnist Greg Ip published, “The Year Politicians Turned Their Back on Economics.”
Meanwhile, don’t be fooled by the Pop-Tarts. Yes, they are delicious, but they are empty calories that will leave you longing for some actual food. I understand why politicians go to populist policies; it is a lot easier than trying to educate on the benefits of good policy. I may be naïve, but I have faith that people would understand if the politicians would simply talk to us as if we were adults. That may be just a dream, but the world would be much better off if it came true. At least that is my perspective.
Warm regards,
Chuck Osborne, CFA
Managing Director
