It's as stark a choice as we have had in a long time, but the macroeconomic outcomes may not be so different.
Financial markets have turned nasty, an epidemic has us all on edge and we are staring at a crucial vote in a raucous Democratic primary. But even before we get results from Super Tuesday, it's already clear that the next president will be one of three people: Trump, Sanders or “Bloomiden.”
While each represents dramatically different political philosophies—let alone personal styles—their consequences on the near-term outlook for the U.S. economy may be less than meets the eye. In fact, whatever the outcome, investors looking to 2021 can expect a further boost from fiscal policy and possibly an even more dovish Fed.
It may sound heretical in such a polarized campaign to suggest this election will carry less than apocalyptic consequences for the future of the United States and the Free World. Some of the speeches and slogans may, indeed, spook markets in the summer and fall, but it’s hard to see how any outcome will alter the current path of economic growth on its own.
“How can you possibly say that?” I hear you cry. “Even your so-called moderate is pushing a massive increase in taxes and regulation that will tank the market!” That may be true, especially if there are other headwinds from Japanese deflation, U.K.-EU trade talks or the coronavirus. But it’s not automatic.
Take a closer look at our composite centrist Democrat: Mike Bloomberg, with the bottomless pockets and Joe Biden, whose flagging campaign may still recover on the strength of his longstanding political network. With Pete Buttigieg now out of the race, Senator “Klowarren” might have a statistical chance, but it’s dwindling fast.
AVERAGE POLLS OF DEMOCRATIC PRESIDENTIAL CANDIDATES
Source: Bloomberg. As of February 28, 2020.
The leading moderates all agree on raising corporate taxes, capital gains taxes and the highest personal tax bracket. (Indeed, in a measure of how far the debate has shifted, their tax proposals are all significantly higher than Hillary Clinton proposed.) They also favor spending a lot of money on infrastructure, health care, education and climate change. Deficit worries are barely mentioned.
If Democrats also take the Senate, the “Bloomiden” taxes will hurt corporate earnings and new regulations will target energy and drug companies. Still, fiscal policy overall will only grow more supportive and the economy should hum along nicely barring other potholes.
The betting markets don’t think Bernie Sanders can beat Trump, but the current polls show him leading in key battleground states. If it’s a strain to imagine what his strident campaign agenda might actually deliver in office, it’s now important to try.
Strip away the politically-charged “socialist” label, which means much less than it seems. His breathtaking spending proposals add up, by his own math, to roughly $40 trillion over the next decade, which he mostly pays for in a variety of new or higher taxes on profits, wealth and income. His proposals on labor rights, climate and housing alone suggest a large tangle of new rules that will chill corporate investment.
But in the real world, his website’s wish list will be watered down significantly even if Democrats control both houses of Congress. Those plans that are actually passed will take time to implement in their most rudimentary form. What looks very likely to happen quickly, however, under a Sanders Administration is that new taxes will be more than offset by a large boost of domestic spending. The policy uncertainty may hurt confidence, but fresh money in the pockets of people who really spend it will cushion the blow.
As for Trump, conventional wisdom has it that markets currently back him on the expectation that his second term will deliver still more tax cuts and de-regulation. This seems to gloss over the likely return of the president’s vigorous trade agenda and fresh tariffs, but that may be easier to ignore when compared to uncertainty around what the Democrats propose.
Fresh corporate tax cuts may be difficult unless Republicans take back the House. Still, fiscal policy will hardly be more restrictive in a second Trump term. Moreover, we all know what the president thinks of Jay Powell, and there will be a chance to name an even more dovish Fed chair just a year into his second term.
ISM MANUFACTURING INDEX & 10Y UST
Source: Factset. As of February 28, 2020.
The stark fact remains that any president’s economic policies are only tangentially related to actual economic outcomes in the near term. Not only do they take time to execute, but they are often overwhelmed by a recession in China or an oil price spike. While President Trump has credited his tax cuts with the strong economy, the reality is that economic growth and job creation in his first three years has not differed much from the pattern during the last three years of his predecessor.
So listen to the candidates, weigh their messages, but don’t automatically believe that any one of them will fundamentally change the near-term course of the economy. They all point to a mildly reflationary path of fiscal and monetary support. Given everything else going on in the world, that may not be too bad.