Dynamic Versus Static Scoring
According to Wikipedia, dynamic scoring is a forecasting technique for government revenues, expenditures, and budget deficits that incorporates predictions about the behavior of people and organizations based on changes in fiscal policy. A dynamic scoring model may include expectations as the population adapts to the new policy. Alternatively, static scoring makes simpler assumptions regarding behavior change due to the introduction of a new policy.
Investors should consider the concepts noted above in connection with any possible changes in economic expectations. For example, many prognosticators are making all kinds of dire projections regarding the potential impact of changes in tariffs. It is too simplistic to just increase retail prices by the amount of any new tariff. Essentially a static scoring approach.
Real life is more complicated and likely to be more dynamic. Manufacturers and importers will have to review their competitive positions and the elasticity of demand when determining how much of any tariff increase to attempt to pass through. If prices go up, consumers may just go ahead and pay the increase. However, it is more likely that consumers will seek alternatives, or reduce their purchases as a partial offset to higher prices.
All comments and suggestions are welcome.
Walter J. Kirchberger, CFA