No Free Lunch: 3rd Quarter 2024 Commentary

No Free Lunch

“Thirty Days, Head on the Pillow.” That was Frank Bragg’s stated rule for my siblings and me after we graduated from college. He and my mother would provide room and board for up to 30 days and then we were out. When he first issued this proclamation, my siblings and I turned to our dear, loving mother for help. “Is he serious, Mom? Thirty days? What if I don’t have a job by then? What if I can’t afford rent?”

Contrary to our expectations and incongruent with her normal sympathetic tendencies, Mom stood by her man, saying, “Don’t worry, children. I am sure you’ll find a job and a lovely place to live. Everything will be fine.” We suspected that Dad had carefully coached her. My sister Katie asked if stopping by for meals counted against her 30-day allotment. Brother John asked if his 30 days had to be consecutive. I respectfully inquired about the likelihood of receiving a financial stipend to move out earlier. Little brother Phillips was still in high school—he just laughed as his older siblings faced the real world.

Times have changed. The job market for recent graduates is uncertain, housing and rent are sky high, remote work permits all kinds of alternatives and the younger generation is dealing with a lot of issues—financial, health, and otherwise—that my generation couldn’t imagine back in the day. But like most parents, my wife and I have hoped for the best and our children have generally lived under the expectation that they will graduate from college, get a job, move out, and be independent. We’re only halfway there with two of the four off the payroll.

In full disclosure, my second son, Carlton, to his credit, successfully negotiated an extension on the 30-day rule. When he graduated from college in May, Carlton breezily announced that he would be traveling for a good bit of the summer, then living at home until October when he would move to DC to start his job. “Whoa there! Not so fast,” I objected. “You only get 30 days under our roof.”

Appealing to his financial-planning, compound-interest-loving father, he said, “But Dad, I did the math. The cost of living is quite high in Washington, DC. I calculated that if I save $4,000 by living with you this summer, that $4,000, if wisely invested, will grow to $160,000 by the time I’m 70 years old.” He had me there. But I couldn’t cave in so easily. “Carlton, there’s no free lunch. You can live here, but you’ll have to earn your keep. I propose leaving a daily list of chores on the kitchen counter each morning. You complete the chores, and your room and board will be provided.” He agreed.

And so, I left him a daily list. And he earned his keep. He mowed grass, trimmed edges, cleaned gutters, washed every window in the house, power washed the porches and walks, cut, split and stacked firewood, cleared fence lines, rebuilt a fence, changed the oil in all the farm vehicles, took our cars to be inspected and serviced, spread mulch, poisoned weeds, cleared trails, bush hogged pastures, fed the animals, and limbed up the tree lines in the pastures. It was a boon for me—my most relaxing summer in years! As for Carlton, he had a roof over his head and plenty to eat. But it wasn’t free. By September, he could not wait to move out.

Carlton Bragg trades labor for rent

Both of our presidential candidates would have us believe that lunch is free. Donald Trump’s trade tariffs, zero tax on overtime pay and tips, and cap on credit card interest rates, and Kamala Harris’s grocery price controls, rent caps, and $25,000 home-purchase assistance are fitting examples. These policies are divorced from economic reality. Neither candidate has mentioned the steep costs of these proposals or acknowledged that each will likely have unintended consequences.

History is replete with examples of the failure of sweeping government price controls. In the words of Catherine Rampell of the Washington Post in reaction to Harris’s proposed price controls (but certainly also applicable to those proposed by Trump):

It’s hard to exaggerate how bad this policy is. It is, in all but name, a sweeping set of government-enforced price controls across every industry, not only food. Supply and demand would no longer determine prices or profit levels. Far-off Washington bureaucrats would. … At best, this would lead to shortages, black markets, and hoarding, among other distortions seen previously when countries tried to limit price growth by fiat.

When government officials decide a price is too high and enforce a price cap, producers in a competitive marketplace are left with two choices: reduce the quantity produced or reduce the quality of the product. In both cases, consumers are harmed; they’re forced to accept inferior products or are faced with outright shortages. Economists like to say that governments can set prices for goods, but they cannot force firms to produce those goods. The laws of supply and demand set prices. When demand outstrips supply (toilet paper in 2020, housing in 2021, gasoline in 1974, etc.), the worst way to increase the supply to meet the demand is to cap the price. As they say, the cure for high prices is high prices. Let the price rise, creating incentive for producers to enter the market to meet the demand, bringing the price back down.

Benton, you are on a rant! I know. I am sorry. And I’ve limited my comments thus far to criticism of the specific proposals of our presidential candidates. These proposals, which may never become law and which may be no more than efforts by both candidates to “buy the vote,” do reflect a larger problem: these days, it seems there is a willingness on both sides of the aisle to accept more government intervention in the economy. History has demonstrated that this poses a threat to our continued prosperity.

Profit incentives in a free-market system result in the most efficient allocation of resources to their most productive use. These incentives encourage producers to take risks, invest capital, and innovate to supply what consumers demand at a mutually agreed-upon price. The producer produces, not for charitable reasons or in response to government mandates but for his own interests. As Scottish economist Adam Smith famously said back in 1776, “It is not from the benevolence of the butcher, the brewer or the baker that we expect our dinner, but from his own self-interest.”

Smith went on to describe the “invisible hand” of capitalism which efficiently allocates resources in our economy through the self-serving choices made by many millions of individuals, companies, investors, employees, and employers. Free-market capitalism is not perfect. The most common criticism is that it unequally distributes the very wealth it creates. Winston Churchill described its vice as the “unequal sharing of blessings,” when he contrasted it with socialism, the inherent virtue of which he called “the equal sharing of misery.”

Free-market economies have created enormous wealth over time. US economic output or gross domestic product (GDP) was $28 trillion in 2023. Just during my 56-year lifetime, US real GDP (US economic output adjusted for inflation) increased from $5.1 trillion to $23.2 trillion (chained 2017 dollars; source: Federal Reserve Bank of St. Louis). On a per-capita basis (considering population growth), real GDP increased from $25,000 to $69,000 during this period (chained 2017 dollars). Remarkably, over the last 25 years, which included the bursting of the technology bubble, the financial crisis, and the global pandemic, real US GDP per capita increased from $48,000 to $69,000, an increase of $21,000 per person or 44%. Our economy is not a zero-sum game. The economic pie has grown remarkably, especially when compared to those of failed command economies such as that of the Soviet Union/Russia, Cuba, North Korea, and Venezuela. While a planned economy with equally shared benefits sounds good in theory, it simply has not worked in practice.

Governments serve a critical function in free societies, including providing national security, education, infrastructure, police and fire services, emergency response for natural disasters, a social safety net, and enforcing private property rights and the rule of law. Government regulation and intervention are essential to provide checks and balances on the extremes of the free market, especially with regard to ensuring competition and rooting out corruption. But governments do not generate profits or create wealth. Instead, governments take with one hand (taxes, fees, fines, penalties) and give with the other through spending on the aforementioned.

When government wields too much power in the economy, when the government picks winners and losers (tariffs, subsidies, targeted loans, preferences), it can distort the market, misappropriate scarce capital, and jeopardize growth, which ultimately harms the very citizens that well-meaning policymakers intended to help. It is a critical balance.

Daron Acemoglu and James Robinson, in their recent book The Narrow Corridor, argued that for a society to achieve liberty, a delicate balance must exist between a strong state capable of enforcing laws and a powerful society able to check the state’s power, creating a “narrow corridor” where neither side becomes too dominant; essentially, a state needs to be strong enough to protect citizens but also sufficiently constrained by society to prevent tyranny, creating a “Shackled Leviathan” that upholds the rule of law and promotes broad-based economic opportunity.

Shackled Leviathan? Did I just type that? If you are still reading, I apologize for the deep dive today. Like you, I treasure the freedom, security, opportunity, and dynamism we enjoy here in our country. No, the USA isn’t perfect. But we are pretty darn good, and we are constantly working at getting even better. Just consider the progress we have made in the last 100 years. My wish is for our Republic to stand, our economy to thrive, and our fellow Americans to prosper. What we have in the US is unusual in the world today, and it is fragile; a quick look at the international headlines makes that very clear.

A few other things:

Our economy continues to grow. Inflation has moderated, interest costs are declining, unemployment is low, and worker pay is rising.

As Matt DeVries explains in his quarterly article, stocks and bonds have done exceptionally well over the last twelve months. Short of an external shock such as an escalation of the wars in Russia/Ukraine or the Middle East, the market is likely to continue benefitting from the tailwind of the improved economic backdrop, especially the impact of the Fed’s actions to lower interest costs (don’t fight the Fed). Bears point out that stock valuations are high relative to history. Bulls hang their hats on a more conducive economic outlook and the potential for corporate earnings growth. As usual, Bragg Financial has been rebalancing portfolios—in this case, trimming stocks and adding to bonds.

We’ll make it to the other side of this election, and our country will survive the next four years. I have found I sleep better when I avoid watching the news on television and read instead. Try it.

Finally, Federal deficit spending is on an unsustainable path and our accumulated Federal debt as a percentage of GDP has reached a peacetime record. Both parties are responsible and unfortunately, neither is even talking about it. I guess it’s easier to get elected by promising free stuff. I sound like an old curmudgeon. But as my son Carlton learned this past summer, there is no free lunch. Now that he is off to the real world, I guess I’d better go blow some leaves. Thank you for your trust in our team at Bragg Financial.

This information is believed to be accurate at the time of publication but should not be used as specific investment or tax advice as opinions and legislation are subject to change. You should always consult your tax professional or other advisors before acting on the ideas presented here.