Ralphonomics 101
By Ralph Hood
August 2002
What
in the world is going on? Terrorism, corporate scandal, stock market drops,
and forest fires set by arsons. Will there ever be a "normal"
again? I am reminded of Wordsworth's poem of 1807:
The world is too much with us, late and
soon.
Getting and spending, we lay waste our
powers.
Ain't it the truth? The news is so bad
it takes guts to read a paper or turn on a TV.
I am also reminded of the Kingston Trio's song of the 1960s: They're Rioting
In Africa. Remember the line that went, "The world is festering with
unhappy souls"?
Alan Greenspan, in the meantime, looks
like a diamond in a slop jar. Five years ago - when we were being told
that it was a new era, the old methods of stock evaluation no longer applied,
and price-earnings ratios were meaningless - Greenspan warned us of "irrational
exuberance." Many laughed at him, and many now wish they had listened.
That was during the era when, as one pundit
wrote, investors thought the stock market went up because they were smart.
Turned out Green-span was the smart one. We had forgotten that stocks
go up because of profits, and not the other way around. Greenspan tried
to warn us, but we didn't listen.
That was also during the era when we thought
the stock market could and would climb forever. (People thought the same
thing in the Roaring '20s, just before the Great Depression changed their
minds.)
The scandals of today had roots in that
go-go era of the 1990s. Since the stock market was going up, what harm
did it do to fudge financial reports a bit, just 'til things got better
(which, after all, they always did)? It could all be cleared up with future
(paper) profits.
Now we are in trouble; and, just like in
the '30s, we are trying to circle the wagons. A few months ago in this
column, I worried because we were passing steel import tariffs. I wondered
if that was a portent of things to come. Now we have passed a 30 percent
- repeat, 30 percent - tariff on Canadian lumber. In other words, we have
decided to charge all of our citizens 30 percent more than the going market
for lumber, just so a few of our citizens can earn more. And they call
this "fair trade." We, and the rest of the world, did this during
the Great Depression; and it both worsened and lengthened the pain.
Another thing: We busily attack pharmaceutical
companies because drug prices are high. We think they are making too much
profit. But expectation of profit is what drives research. If we cut the
expectations, it will cut research and cut the introduction of new drugs.
True, nobody will make obscene profits from drugs that are not introduced.
Nor will the rest of us benefit from those drugs.
Do we in aviation need to worry about all
of this? Well, historically, sales of durable goods drop faster than other
items in a recession, as do other items that are (like travel) bought
with discretionary dollars. Does that describe aviation? Looks like a
"duh" to me.
More than anything else in economics, I
worry about two things: increased tariffs (as if we can make a living
selling overpriced products to each other), and our tendency to attack
profits during scary times. The Soviet Union tried both for more than
70 years. They went bankrupt.
