Political Policies That Make No Sense

Another day, another record high on Wall Street.

Not much to say about that, really. It is what it is.

The economy isn’t horrible, though it’s certainly not all that and a bag of chips, given the financial strains on much of middle-class America, the rising number of bankruptcies, the increasing number of car payments in default, the rapidly escalating balances on credit cards, etc., etc.

But there is something I want to talk about regarding the stock market and our future economy…

I do not mean this to be political in any way, and I am not advocating for one side or the other in the coming election.

This is purely an educational dispatch.

In truth, both Red and Blue politicians represent everything that is wrong with America’s finances, particularly anything centered around the debt. One side is going to blow out the debt through student-loan forgiveness and aggressive spending on healthcare and other social programs.

The other side is going to blow out the debt through unwise tax cuts and no logical way to pay for them.

That’s not me talking (though I don’t disagree with the assessment), that’s the analysis of the Congressional Budget Office, various economists, and others who have deconstructed the Red and Blue taxation and spending plans.

What I want to address in this dispatch is two recent claims from the Red Team: The idea that tariffs are a solution to America’s problems, and the idea that energy prices can be cut by 50% in the first year of a Red presidency.

In a word: Absolute and total BS! (OK, that’s a phrase and not a word.)

Again, this is not political. This is purely economic education because I want my readers to fully understand how this works, because the impacts will hit the US economy as well as the stock market… both negatively.

First, tariffs.

Tariffs are NOT a tax that a foreign country pays. 1,000% wrong.

A tariff is a tax an importer pays to import a particular product into a country.

So, if Billy Bob’s Chicken and Waffles Emporium in Duluth, Minnesota imports maple syrup from Hoser’s Great White North Maple Syrup Bodega in Quebec, Canada, and there’s a 200% tariff on Canadian-made maple syrup… well, Billy Bob pays that tariff.

Hoser’s Great White North pays nothing. Canada, the country, pays nothing.

Hoser’s Bodega sells the syrup to Billy Bob for the same price as always, but Billy Bob’s—a US company—has to pay Uncle Sam a 200% surcharge to import the liquid amber.

That is how tariffs have always worked. Period. End of discussion.

But what does that mean in practical terms?

Well, it creates inflation (higher prices) in America that American consumers must deal with.

Suddenly, syrup is more expensive in America because syrup importers like Billy Bob’s are paying a massive tariff. They are not going to absorb that cost through the goodness of their heart. They’re going to pass along the added cost to their customers in the form of higher prices at the supermarket or on the menu.

Now, apply that simple syrup example to thousands and thousands of products that potentially face a Red Administration tariff hike, and you can see that US consumers face unrelenting inflation.

And let me disabuse any notion that this just means more jobs for US producers.

Again, no.

Many products America imports have no US producers, and won’t because of labor issues. And for those that do, the tariffs just mean that US producers can (and will) raise their prices to just below the higher cost of the tariff-afflicted foreign products in order to gain market share.

Either way, you get inflation.

As for cutting energy costs by 50%… that is A) a disaster for the US energy industry, and B) impossible to do in 12 months in terms of cutting electricity costs, which is what Team Red claims it aims to do.

US natural gas prices, currently at $2.60 per million BTUs, are deeply low already. West Texas Intermediate Crude—the US benchmark oil price—is at about $71 per barrel. Not really high, but not really low. Let’s call it a Goldilocks price.

If oil prices collapsed to $35 per barrel and natural gas collapsed to $1.30, the US energy industry would fall apart. Bankruptcies and joblessness would race through the sector. Drilling for new reserves would evaporate. I know this because it’s exactly what happened during the last Red Administration when Team Red convinced Saudi Arabia to ramp up production in order to bring lower gas prices to American drivers.

Well, that happened because oil prices fell from the mid-$80s to the low-$50s.

Gasoline prices did fall a bit, but at what cost?

The oil industry went into freefall; the stock market fell, too. Energy industry bankruptcies soared in 2019. Jobs in the oilfield evaporated.

That would happen again. No question. It’s the very simple math of life in the oil patch, which I’ve seen first-hand since the mid-80s, as someone who grew up in oil country and who spent part of his career hanging out with oil pros in Texas when I worked as an investment writer for The Wall Street Journal.

Now, the idea that Team Red wants to cut electricity costs by half within the first year, which is a pledge recently made, is illogical.

Electricity prices are set by contractual agreements negotiated over months, sometimes years between thousands of public and private utility providers across America, and the various state utility commissions that regulate electricity providers locally and determine the rates they can charge to recoup their costs plus an agreed profit margin.

There’s not a snowball’s chance in Hell that any politician on any side of the political spectrum can step in and break all of those contracts in order to force utility costs 50% lower.

If that were to happen through some bizarre executive order, the number of lawsuits would overwhelm the courts and it would be hung up in litigation for years. Forcing rates lower would destabilize the entire utility industry, lead to massive layoffs, and, again, slam the stock market, since utilities represent about 3% of the value of the S&P 500 (that’s not insignificant).

What I’m ultimately getting at here is this: Politicians can have outsized impacts on the economy and the stock market through the policies they push. Sometimes those policies, even if painful in the short term, make a lot of sense for the long term.

And other times, the policies make no sense on any level across any period of time.

All they do is threaten to destabilize the economy and undermine the financial markets, all in the pursuit of votes and power.

I’m not telling you how to vote. Like I said, both parties represent bad news for America’s debt.

But I want everyone to understand how tariffs and energy policy work, because they will have a direct—and negative—impact on inflation, declining economic growth, rising unemployment, and falling stock prices.

Again, that’s not me telling you that.

It’s basic Economics 101.