Ralphonomics 101

Aug. 8, 2002

Ralphonomics 101

By Ralph Hood

August 2002

Ralph Hood is a Certified Speaking Professional who has addressed aviation groups throughout North America. A pilot since 1969, he's insured and sold airplanes at retail and distributor levels and taught aviation management for Southern Illinois University. Reach him at [email protected]

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.