Market Ignores Gov’t Policies: BENN
The market tends to react to price increases by … wait for it … increasing prices.
When the price of a product sourced from the U.S. rises due to reciprocal tariffs, the prices of competing products are also raised, to position their products within the price differential matrices that they had determined was best for their products. That they capture more profit margin is an obvious outcome. And when the tariffs are removed? The prices do not revert to prior levels.
I observed these market realities first hand during the 2010-20 decade, in my position as a chief financial officer. During Trump’s first presidential term, the U.S. imposed some 10-per-cent-ish tariffs on select Canadian goods. The Trudeau government retaliated with a similar tariff on hot water tanks, the majority of which were natural-gas-fired units built in Tennessee (a strategic choice of targeting a red state). A Quebec-based manufacturer of electric water tanks then raised its prices, negating the preferred outcome that Canadian consumers would shift their product choices to a lower-priced unit. When the tariffs were removed, the prices for all types of hot-water tanks stayed the same. Welcome to market dynamics.
The same concept applies to products that are promoted by government policies by way of rebates.
Earlier in the previous decade, the federal government offered an about $1,500 rebate to consumers purchasing a high-efficiency natural-gas-fired furnace. The market place reacted with a $1,500ish increase in the price of high-efficiency natural-gas-furnaces. When the rebate program came to a conclusion, the price of furnaces remained at their inflated prices. Again, market dynamics.
The message is that those who assume away reality (market dynamics) when designing policies to influence the marketplace are dreaming in colour. Rather than containing inflation, they generate it. That is the reality of the market place. That is the reality of the limitations of government ‘interference’ in the market place.
Ron Benn, a finance executive, has been a member of the Centrepointe Community Association for the better part of three decades.
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Informative and useful. Thank you. What other retaliatory actions would work better?
Useful comment, thanks
Good info and something to watch out for. I suppose the way to protect yourself is to require the vendor to supply their pre-tariff prices as well as their current ones. A good argument, too, for government wage and price controls.
Voter, economies are complex ‘creatures’. Before introducing elements such as wage and price controls a comprehensive understanding of the impact of those policies need to be understood. I doubt that the full range of consequences can ever be understood, let alone mitigated.
The challenge in all modeling is in understanding how interwoven everything is. Too often the model assumes that many of the variables will remain constant. While convenient for modelling purposes, it is naive to think that will be the case.
A metaphor worth considering are the advertisements for pharmaceuticals on American TV channels. Five to ten seconds of benefits, 50 – 55 seconds about possible side effects. Side effects that were discovered in controlled test environments. There are no controlled test environments for government policies. Just trial and error. Thus the favourite term for governments “explaining” why their policy didn’t achieve the expected results – unintended consequences. Unintended the consequence may be, but often that is because insufficient effort was put into examining the full range of consequences that might arise.
The lessons of the 2010’s is that while the policies may have had some positive impact, for instance replacing older energy inefficient furnaces with higher efficiency units, there were ‘side effects’ – notably permanent price inflation on home comfort equipment. Were these anticipated by the people who developed the policies before the policies were put in place? We don’t know, nor are we ever likely to know, because open, transparent, accountable government is an anathema to those who govern.