My wife and I were driving in the countryside and, from her photography perspective, she said, “Look at that beautiful ramshackle farmhouse.” To which I cynically responded, “Or a meth lab.” The farmhouse was real, the meth lab may or may not have been. And while some dilapidated farmhouses may turn into meth labs, it is likely to be very few. But in these times, it is interesting to look at some of the things happening in the economy to determine when farmhouses may be on their way to turning into meth labs.
Take tariffs. In a perfect economist’s world, trade is completely free and production occurs in the place where the relative costs are the lowest, ultimately leading to overall lower product costs for us. Our world, though, is far from perfect. Government may subsidize businesses for a variety of reasons — i.e., for strategic importance or to spur employment. Governments may also try to support their home grown businesses through restraining trade (like tariffs).
Both subsidies and tariffs create competitive imbalances because they make trade less free. Free trade may be a new farmhouse, subsidies and tariffs make it a bit rundown, and the degree of the subsidies, tariffs and disagreements can turn it into a meth lab. We don’t know where the current trade posturing will land us, but we can predict certain results. The good news is that potentially deals could be made, but the bad news is that there will be increased costs and lower revenue for many of us. This is math.
We also don’t know the residual effects of this economic strategy. We don’t know how long countries with which we are dealing will penalize us for our actions nor how long we will penalize them for theirs. We don’t know what the effect will be or what the new rules of negotiating will look like. We don’t know how businesses will deploy capital in an uncertain trade world. In other words, we don’t know whether the farmhouse is going to become a meth lab, but it probably is unlikely to be renovated.
Another area where we are unsure of what is going to happen to the farmhouse is employment. More people working is a good thing. Almost full employment should ultimately lead to a rise in wages. Employed people should have money to spend, which should be good for the economy. But since virtually every psychology article describes how we need to drop the “shoulds” from our lives, full employment could actually turn the beauty of the stock market farmhouse into something more run down. Lower taxes, deregulation, and more workers have been good for the markets, but eventually they cause the paint of the stock market to peel. In order to try to prevent inflation, the Federal Reserve has slowly started to raise interest rates. Companies that borrow money will have to pay more to do so — and you will, too, for your mortgage or car loan. Companies that are forced to increase wages should also see their labor costs go up, thereby (at least temporarily) hurting profits. There are a number of reasons why stocks rise in the short run, but in the long run, they rise based on expected profits. If expectations drop, prices should eventually follow. This means don’t invest as if the farmhouse is pristine and easy to maintain. Expect it to be in for some work.
College costs are another area where the farmhouse is showing signs of wear. Over the past several years, college cost increases have generally exceeded the rate of inflation. Colleges are trying to control costs while attempting to upgrade the college experience. While much of the focus has been on trying to bring down excess administrative costs, and this is certainly an important objective, less attention is being paid to how many students are demanding more expensive housing, better food, and premier facilities. The costs for this has to be borne somewhere — endowments, debt or tuition. When you also include the priorities around diversity on campus — economic, racial, religious — and the potential costs around this movement, hallowed halls are heading toward dilapidated farmhouses.
A diverse educational experience is a reasonable priority, but do students need a Four Season’s experience? The college farmhouse can turn into a meth lab when a student realizes upon graduation that the lifestyle they enjoyed in college is not that easy to reproduce in the working world, especially those who had to borrow for schooling. For parents who can afford to continue to subsidize their children long into their careers, this may not be a financial concern, but it still has ramifications.
When expectations are so high for a lifestyle that is likely to be difficult to maintain, we are potentially directing children into careers for the wrong reasons or interrupting their own rites of economic passage that contribute to real satisfaction and self-worth. Who wants to spend time restoring a dilapidated farmhouse when they have spent years in the lap of luxury? Is this what we want?
Much of our economy is self-correcting, so while some current economic concerns are real, expect the farmhouse to be restored.
Ross Levin is the chief executive and founder of Accredited Investors Wealth Management in Edina.