What makes economics more frustrating than investing is that the truth is never completely settled. When you buy a stock with the plan to hold it for 5 years, the price in 5 years is guaranteed to tell you whether it was a good investment or not. Economic analysis is never complete because there will always be divergent opinions about the labor market, strength of the consumer, etc. We’re not worried about setting policy as investors and analysts. However, it’s almost as difficult to make investments based on economic analysis as it is to set policy because both scenarios require knowing the effects of each policy as well as understanding how constantly changing, and often unpredictable, external factors impact the economy.
To quickly bring this conversation from the abstract to reality in a simplified example, if you knew fiscal stimulus through tax cuts and spending would boost growth, it could have helped you go overweight US small caps in 2018. There’s much debate on whether the costs of the stimulus are worth the benefits which appear to be a boost in growth. Either way that analysis directly led to investment returns. Getting back to the point of how difficult it is to do work in economics, we can never know the exact effect of the fiscal stimulus because there isn’t a way to test policy in a vacuum. We have changes to monetary policy, tariffs, and global growth to contend with.
Reason To Be Optimistic About Income Growth
Just because economic analysis is difficult, doesn’t mean we don’t try to do it. Usually the tough questions unlock the most profits because the obvious is mostly priced in. That’s not to say there aren’t examples where ‘easy money’ can be made.
One of the most hotly contested topics is the strength of real incomes because political charged people act as if whoever is in power has complete control over the results. Therefore, whether the economy is good or bad for median Americans can determine who wins elections according to this fictitious assumption. In a complex mixed economy there are numerous factors affecting results.
