October Insights: Pop-Tart Economics

Pop-Tart Economics

During this Presidential election season, we don't like to talk about politics, but we do talk economic policy and how it might impact our clients and their portfolios.

We certainly don't promote high-fructose corn syrup but sometimes as family's are always on-the-move, things sneak into the pantry. Pop-Tarts are certainly delicious but maybe not the healthiest breakfast choice.

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 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. 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.

So we don't leave anyone out, 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.”

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 a product for, the more of that product they're willing to make, and the lower the price, the less they're willing to supply. However, the consumer has the opposite incentive: The lower the price the more they'll buy, and the higher the price the less they'll 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. Price controls lead to shortages and rationing.

Meanwhile, don’t be fooled by the Pop-Tarts. Yes, they are delicious, but they are empty calories that will leave you longing for actual sustenance. I understand why politicians go to populist policies; it is a lot easier than trying to educate on the benefits of good policy.