Two Angry Men

Those of you unfortunate enough to have watched the US Presidential (so-called) debate were witness to an event which gives democracy a bad name. Chinese officials wanting to demonstrate the superiority of their system could do worse than force the Chinese population to watch the debate in its entirety. It was devoid of form and content and was characterised instead by name calling and fractiousness. Whilst it always matters who wins the US election, this time feels even more important than usual. Moreover, it matters how the aftermath of the election plays out. If, as many fear, Trump loses the election but does not agree to a peaceful transfer of power this would take the US down a dark road from which it might be very difficult to return. However, whilst this is a risk, we should perhaps refrain from getting too far ahead of ourselves. Instead let us confine ourselves to looking at some of the many economic issues that did not get an airing.

Four years on

Four years ago, in what we thought was the most unedifying campaign in history, we were at least able to pick out some discernible economic policies. Both Donald Trump and Hillary Clinton set out a clearly defined tax policy, for example, and Trump gave fair warning of his protectionist trade stance. The economics is less clear cut this time around although that is because tackling the Covid-induced economic collapse and the resulting rise in unemployment are – or should be – priorities for Messrs Trump and Biden. Trump has raised the use of Twitter to an art form and has spent the last four years tweeting about the strength of the stock market as a barometer of the economy’s strength. Although the economy suffered a dramatic plunge in output in the second quarter, with the result that employment levels are back at early-2015 levels, the equity market is broadly back where it was prior to the March collapse. However, it is likely that voters will use the evidence of their labour market experience as a barometer of how strong the economy is rather than rely on the elevated level of the equity market.

It's the economy, stupid

One-term presidents are rare these days and in the last 100 years only Herbert Hoover (1932), Jimmy Carter (1980) and George H. W. Bush (1992) have served a full presidential term only to lose at the second attempt. In all three cases the weakness of the economy was the factor which undermined their efforts to win a second term. The economic position facing Trump less than five weeks ahead of the 2020 election is at least as bad as that facing his predecessors. The role of government in providing support is proving to be one of the more contentious economic policy issues. The Coronavirus Aid, Relief and Economy Security Act (“CARES Act”)  has provided support equivalent to an estimated $2.3 trillion (11% of GDP), whilst the Paycheck Protection Program and Health Care Enhancement Act chipped in another $483billion. Talks on further support are stalled in Congress and time is running out to reach agreement before the election, with the Republicans keen on business support measures whilst the Democrats are looking for more support for individuals (e.g. increased unemployment benefits).

Pressure on the Fed ...

The role of the Federal Reserve could also come under scrutiny after the election. Trump has frequently excoriated Jay Powell (whom Trump nominated) for not doing enough to support the economy even before Covid in a series of messages which are reminiscent of the way Turkish President Erdogan treats the Central Bank of Turkey. We can be certain that if Trump were to win in November the Fed will come under even greater pressure to bow to the demands of the White House. Trump has nominated Judy Shelton to the FOMC – a nominee who believes in returning to the gold standard and has in the past been extremely critical of the Fed. It is uncertain whether she would receive Congressional approval even if Trump were to win. It is pretty certain that she will not get the nod under a Biden presidency. But analogous to the way nominations to the Supreme Court have become another front in the culture war, so the Fed has become another unwilling participant in the war between the various political factions in the US.

... and China 

Whatever else happens, relations with China will dominate the next four years. Trump has made it clear that he is willing to do whatever it takes to ensure the US remains the top dog and the view from China is that he is trying to suppress China’s rise come what may. Just as matters seemed to be cooling earlier this year, events have since heated up again. Trump has demanded that Chinese firm Bytedance, owner of the app TikTok, sell its US operations; he has banned the sale of electronics components to telecom firm Huawei, and has threatened to delist Chinese companies from US stock exchanges. Although under a Biden presidency the China bashing may be less aggressive, the Democrats are not about to re-pivot towards Obama’s pro-Asia stance. Biden's proposed trade plan will confront China in cooperation with allies rather than acting unilaterally on trade, and he plans to tighten rules against corporate inversions to discourage companies from moving overseas.

Health and taxes

One of Trump’s signature polices was the 2017 Tax Cuts and Jobs Act which consisted of a large, permanent tax cut for corporations and temporary cuts to individual taxes that will expire in 2025. One consequence of the Act was that investors used the tax cuts to repatriate funds back to the US and channelled it into share repurchases and dividends, rather than wage increases or investment. Biden’s tax plans point to a swing in the other direction with tax hikes for wealthy individuals and a plan to raise the taxes on long term capital gains to the same rate as normal income. To the extent that the Trump tax plan supported the equity market, Biden’s plans are likely to be a lot less equity supportive.

Healthcare is another major economic issue particularly in the wake of the huge spike in Covid-related deaths. Having failed to repeal Obamacare the Republicans may be treading on thin ice on this issue. Obamacare is generally popular and the House rejected a serious effort to overturn it in 2017 on the grounds it would be a vote loser. We hear far less these days about the negatives of the policy although this does not preclude the Republicans from making another attempt to repeal it in the next four years. But such an attempt would never be passed by a President Biden. Healthcare will thus be one of those issues that the two sides of the political spectrum will fight over when there are less pressing things to worry about.

May the man with the best pitch win

Of course we heard none of this last night. But when it comes down to it the candidates have to realise that attacking each other is pointless – the man who wins on 3 November will be the one who makes the best pitch to restore the living standards of voters. It is hard to make a proper judgement from this side of the Atlantic but if the debate was anything go by, that person is not Donald Trump.