Statics vs. Dynamics

The turtle and the hare

by Tom Adkins
01/01/04

Sports heads love to throw stats around. You’ve heard them. This guy bats .350. That guy hits a home run every 15.6 times at bat. For some, it’s almost an affair, even an obsession. Economists have a similar love affair with statistics. You’ve also heard them. Price to earnings ratio, quarterly earnings, capitalization. And people toss those statistics around like an Animal House food fight. Money managers rip them apart. Stock pickers pore over them.

CEOs massage them. Why? Because there are trillions of dollars at stake. Guess ahead of the curve, and you could rack up fat profits. Make one wrong move, and your clients can lose millions. And you could be flipping burgers.

In the economic world, economic theorists boil into two groups: “Statics” and “Dynamics.” Statics look at charts, plot graphs, and declare the future based upon the past. Dynamics look at charts, then look at changing economic conditions such as tax code, regulation, interest rate changes, and American sentiment and make a guess.

Chart heads are safe, but slow. By nature, they are always behind the curve and never see the road bumps. But good Dynamics are almost always rewarded because they paint a good picture of the future, and make good guesses. It all boils down to sound fundamentals. Tax cuts will grow an economy, and the stock market will follow. High regulation will kill the economy, and stocks will suffer.

But believe it or not, there are many highly paid “experts” in every level of American life who have no idea how economies work. Former Treasury chief Robert Rubin is convinced to this day that Bill Clinton’s tax hike created the 1996-1999 economic boom. He forgets that the Clinton tax hike created the worst 30 month performance in 50 years, and the economy didn’t take off until the GOP swept Congress and passed the capital gains tax cuts and reformed Welfare. And Rubin works on Wall Street. John Corzine insists we should socialize our medicine, just like the Canadians do, and the economy will just keep humming. He worked on Wall Street too. Howard Dean believes he will make the economy streak to new heights by taking back the tax hikes that created the good economy in the first place. And he is a Governor.

It’s not all Democrats. The Republican Congress apparently believes jacking up spending on silly pork projects won’t affect the economy, forgetting what got them back into power in the first place, and forgetting what cost Democrats the Congress in the first place.

Herbert Hoover once remarked he needed a one handed economist because he was getting tired of hearing his economic advisors begin every explanation with, “On the one hand …” In the business world, those who keep guessing wrong end up flipping burgers. But in government, unqualified people with poor track records often become icons. Alan Greenspan caused two nasty recessions by making immense interest rate hike mistakes. But when he faces Congress, most of them have almost no understanding of capitalism, and they can barely ask qualified questions. Yet there they all are, representing you and I, and making earth-shattering decisions.

But Statics always have a refuge. They can pull out the charts and say “look at this…it sure looked good at the time, didn’t it?” The client grudgingly nods his head and grumbles, as the Static rationalizes that you win a few and lose a few, and remember that big home run with Amalgamated Federated Corporation last May?

On the other hand, Dynamics have no rock to hide behind. Pick wrong, and you have no excuses. “I thought the market was going this way, but it went that way.” The client thanks him for his services and fires him with an e-mail 3 days later. After all, his stock expert gets paid to guess right 100% of the time. Meanwhile, his guess was goofed because some bureaucrat passed a little edict that devastated their market niche.

When you clear away the cobwebs, wash away the mud, and stop shoveling the dookey, it all boils down to economic fundamentals. And it’s amazing how few people on Wall Street, Main Street, and Washington understand economies. So, let’s sum up where we are and where we are, how we got there, and where we are going. We are in a solid recovery. Our slow economy was caused by Alan Greenspan raising interest rates. Our strong recovery was created by lowering taxes and lowering interest rates. More tax cuts are coming, and Greenspan has assured us rates aren’t changing. That means excellent growth. See? Wasn’t that easy?

Still, there’ll always be a job for the Statics. After all, there is always a demand for mediocrity, and always a market for people who appreciate gloom. They will have plenty to complain about at the end of this year, when they miss the market…again.