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David and Tom Gardner

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from: David Gardner

Economists vs. Politicians, Take 2

Posted Wednesday, May 9, 2001, at 12:57 PM ET

Tom,

Good morning. I know you're still asleep, Hawaii being six hours behind the East Coast, so I'll kick off today by a quick look at "The Fray" message boards. As you well know (but as someone reading this may not know), interactivity is at the heart of our Web site Fool.com and at the heart of what we love about the Internet. The Fray over here at Slate gives anyone an opportunity to respond to stuff written on the site, including our ever-so-private e-mail exchange.

To which I say, bully to it. I've enjoyed the notes I've read in The Fray (though I question the selection of that name, since a riff on the Heisenberg Uncertainty Principle suggests to me that the name determines the quality or attitude of what's posted). And I did want to respond to one note reacting to yesterday's last exchange.

Arthur Stock wrote that I was wrong about this supposed "war" between politicians and economists. And maybe I am. I'm going to ask Sowell about that in our radio interview today. Anyway, Arthur wrote, "You also insult politicians when you claim they don't understand numbers." Mea culpa, as I was too blanket with my statement that economists, in contrast to politicians, "understand the use of numbers." I should have written, "better understand the use of numbers."

I'm certainly not saying NO politician knows numbers--some know numbers far better than I! I was generalizing, and you tell me whether you agree or not that economists on the whole are more numerate than politicians.

Here's another generalization: Present-day economists are more inclined to (let's say) respect market pricing and laissez faire policies than present politicians would be. (There are always outliers--again, I'm speaking in aggregate.)

If you yourself agree with my two generalizations, you will see why I have more intellectual respect for economists than politicians.

The "war" idea is borne out of the conflicting respective interests held by politicians and economists. The politician's aim is to be re-elected--again, I think, a fair generalization. (And they're good at this, by the way: Did you know that a shocking 392 of 399 House incumbents were re-elected in November?! What does that say?) By contrast, what is the economist's aim? Take your pick on answering this one, but my best shot is that an economist's primary aim is to earn the respect of his peers and society at-large--a longer-term effort that involves more truth-seeking and more accountability, in my opinion.

The war then occurs because, trying to please the electorate, politicians will make short-term pledges and promises over most good economists' objections. You want an example?:

"We won't let these greedy energy companies charge the good people of California above such-and-such, ANYMORE!" (The people say, Huzzah.)

... whereas the economist more dispassionately points out how price control will cripple the system, reducing supply of energy ("I ain't gonna supply energy when there's no money in it!") while at the same time raising the demand (energy is available at non-sustainably cheap prices).

That's the so-called "war," as I see it, with one typical example of the results. I don't mean to make too much of this, but I did want to respond to a good note from Arthur Stock. Feel free to take us in a different direction. Talk to you in a couple of hours.

David

the breakfast table
entries
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from: David Gardner

Economists vs. Politicians, Take 2

Posted Wednesday, May 9, 2001, at 12:57 PM ET
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David and Tom Gardner are co-founders of The Motley Fool, a personal finance company. They are dedicated to educating, amusing, and enriching people through their Web site, books, newspaper column, and radio and television shows.
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[Notes from the Fray Editor: We're running Arthur Stock, because of his starring role in this week's "Breakfast Table" (this was his featured post), but Kate persuasively argues the opposite about Krispy Kreme here ("Hot sugar and fat beat microchips..."). Some good ruminations about the quality of life of the have-nots: try LT here (the lifeguard was a woman in fact--LT knows why that would be ironic...), or this post: "Short sightedness does not magically transform the HaveNots into Haves, it just keeps them from griping about the inequities." RonK has a comprehensive flame post for anyone looking for an argument here. There are Questions for Sowell here from Tom R, and two points of view on what The Fray has to offer in this thread.]


Krispy Kreme is a pure momentum play, and its momentum is played out. It's a product that appeals to the stock-buying class, and was new to many in that class (since it went national very recently) when they bought the stock. These stocks do well at first because people buy the stock after enjoying the product, without looking at balance sheets. Then the stocks collapse to sane levels--P/E closer to 20 than 90. Think of Calloway Golf Clubs some years back, mircobreweries, cigar sellers, Yahoo, and in the food world Snapple and Boston Chicken. Starbucks is almost an exception that proves the rule, but even it had several 50% falls along the way.

Krispy Kreme has limitations that can't be fixed: food is a competitive industry; Dunkin' Donuts demonstrates that there is competition even in the sub-category; franchise operations are subject to all kinds of accounting gimmicks for the first year. Boston Chicken, now in bankruptcy, was notorious--I don't know if Krispy Kreme is playing accounting games, but it would be difficult to determine that it isn't.

Foods with holes in them are especially poor investments, as Manhattan Bagel, Einstein Bagel, and several other bagel purveyors proved.

--Arthur Stock

(To reply, click here.)


 Whenever I hear someone start talking about finding for-profit solutions to social problems [Monday's entry] I think of a quote by Bill Speidel about Seattle's city fathers. "If they could have made more money by not building a city, they would have."

And there, in a sentence, you have the promise--and the problem--of for-profit ventures. What looks from outside like a remarkable feat of a healthy social conscience, in truth, relies on nothing more than a healthy respect for the bottom line.

The trouble is there in that "if" clause: when that bottom line comes into conflict with the social goals and one or the other has to give, which way are the venture philanthropists going to jump? Especially with any philanthropy that ventures into the tricky area of public goods, the good accomplished is only rarely monetizable.

--James Grimmelmann

(To reply, click here.)


 As far as I know, no society has yet come up with an incentive structure which rewards leaders by how well they are able to make impartial policy decisions, though it would be a great discovery. It's a nice try, but I don't think hiring economists to run the country would be the perfect solution.

The problem with economists is that they study only certain social relations, those that can be converted into cash. There are indeed harsh economic realities that we must face in making policy decisions. However, there are also harsh social, diplomatic, and environmental realities which economists do not take into account in their analyses. Of course economic growth is important, and policy makers should know exactly what they are doing to the economy and to individual businesses, but they should not assume that commerce trumps all other interests. (Stop waving those copies of Atlas Shrugged at me! Ayn Rand isn't even an economist!)

--Jane Grey

(To reply, click here.)

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