Policy Risks: Ahead of the Debate
We look at some easy debate topics that we hope the moderators address.
Do we blame the ship owner, the Captain, the iceberg, or the lifeboat supplier?
Or Leo?
We consider a few obvious economic issues that need more than one question and follow-up when the answer inevitably does not come or is evaded. Usually, the moderators bale as part of their “safety first” career planning.
Fact checking may be out as a process, but follow-up questions will hammer home who is ducking a topic such as tariffs and taxes.
For Trump, the question is, “Where are those billions collected from China given the fact that the buyer pays?” Then follow up with “What happens when the trade partner retaliates?” and “Are you worried about more supply chain shortages?”
For Harris, the question is, “Can you give us an example of a specific industry where quality and cost or supply and demand are not the governing principles of pricing?” Then follow up with, “Who gets to determine what is a fair profit margin?” and “Do prices and wages both get controlled or just one of them? Or neither?”
We discuss a few issues ahead of tomorrow’s debate after so many of these exercises in attempted showmanship have proven so disappointing over the years. Facts do not get probed, and the moderators do not push follow-up inquiry in the manner that had always been a tradition in “real journalism” before the age of “performance first, factual clarity second” by talking heads more focused on their own personal brand while protecting the ability of the employers to get the desired guests and rating.
As we head into a Presidential and Congressional election that has so much at stake for the economy and sets the stage for radical shifts in policy, there are some issues that rise above others. On the short list of economic issues, the shaky foundations of the US sovereign financial health, the potential for tariffs on a scale that threatens the health of many industries and households in 2025, and issues around what has been learned coming off the first inflation fighting war in over 4 decades should promote some more targeted inquiry and an upgrade in the usual conversation on inflation and tariffs.
Debate time and election handicapping = policy risk…
With the debate teed up for Tuesday this week, the forward-looking market questions will not just be around who is in the White House. The market focus will also need to be on who controls the purse strings (the House) and how the Senate frames up as a safety valve to prevent the worst of policy excess by either side.
In a GOP sweep, “going nuclear” (no filibuster) will be demanded by Trump, and McConnell will not be there this time to be a check (even if he were still Majority Leader). The GOP Senators who see themselves as Terminator-macho turn into Pee-wee Herman when Trump barks.
A Democratic sweep promises to materially increase taxes with some new twists attacking capital gains and with death as a “realization event.” Even if there is a very high floor on the realization event, the other side of the equation (capital gains in the sale of a small business) is ordinary income above $1 million on the sale of a company (the way we read the proposals). That seriously dampens entrepreneurial impulses and undermines the economics of risking capital with the attendant limits on economic multiplier effects. Small businesses are risky enough to start. The Democratic plan favors wages over reinvestment and expansion for small, closely controlled companies. Fewer jobs, less expansion, and less investment/hiring seems like a bad idea.
The low bar for debate moderators…safety first…
A debate questioner worth a dam would ask about that “going nuclear” topic, but we just answered our own question (i.e., it will not be asked). The same absence of detailed inquiry will likely only give minor focus to tariffs, which is the single most important economic variable in this election – yes, ahead of taxes, which is a topic every election.
Someone should ask Trump where his “billions and billions” in tariffs collected “from China” went when the “buyer paid” during his term. The media and more than a few respectable print media types still try to imbue a fact with flexibility. The economic impact of tariffs and how it flows along the transaction chain is a nuanced economic analysis…who pays is not. The collection of billions from China is Trump’s second biggest lie (on a very long list).
The fact that Trump wants to use tariffs to fund a Sovereign Wealth Fund under his control just adds to the need for clarity on the topic (see Trump's New Sovereign Wealth Fund: Tariff Dollars for a Funded Pool of Patronage? 9-5-24). After all, he controls tariffs and may be looking to step around Congress to raise billions for his own whimsical deployment to allies and to “buy love.” The actual flow of tariffs (buyer pays) is clear to anyone who knows the tariff topic, but they are apparently not moderators at debates (that means you, Jake Tapper and Dana Bash). ABC up next.
Policy risk will heat up as a variable into the fall…
With respect to policy risk and “going nuclear,” the Congressional checks and balances do not work as well as they did in the “old days” since Congress is wholly dysfunctional. There are too many people in the House you would not pick for your team in a 3rd grade spelling bee (certainly not a 5th grade math team). That means the extreme differences in policy positions will not get checked under de facto party line votes. Congress has sheepherders these days as party leaders except for a few rabid dogs in the mix to work around.
The bipartisan approach taken in Washington under Clinton and Reagan led to economies that dwarf those of Trump and Biden (see Presidential GDP Dance Off: Clinton vs. Trump 7-27-24 and Presidential GDP Dance Off: Reagan vs. Trump 7-27-24). Unlike Biden, only Trump is dishonestly laying claim to the “greatest economy in history” with his average annual GDP growth of 2% after being bailed out by the Fed in 2019.
The FOMC executed on 3 fed funds cuts in later 2019 when the Trump economy stalled after an abysmal set of market conditions in 2018 (see HY Pain: A 2018 Lookback to Ponder 8-3-24, Histories: Asset Return Journey from 2016 to 2023 1-22-24). Even his own fans knew that tariffs undid his tax cuts, but he gets high on his own supply with the rush he gets from slapping tariffs on countries.
In a head-to-head matchup, Biden wins the “better economy debate” in our view (not by much) across the GDP line items such as median GDP growth by quarter, PCE, fixed asset investment, and employment performance, but Biden loses (badly) on inflation. Both Trump and Biden numbers look good vs. Bush and Obama given the macro and market shocks those two faced.
The situation for Biden with inflation is a throwback to Carter in some ways, but Jimmy Carter posted 3 years with higher annual GDP growth and materially more job adds than Trump did (see Employment Across the Presidents 8-15-23). That did not stop Carter from being one of Trump’s pin cushions.
Easy questions to ask on deficits and inflation…
Trump seems to skate in the Q&A on explaining his horrible deficit performance (see US Debt % GDP: Raiders of the Lost Treasury 5-29-23). Both Biden and Trump lack bragging rights there, but Trump is pushing for more tax cuts, more tariffs, and more spending. How does this add up? He claimed he would lower the US deficit in his first term. Now, he’s claiming he will eliminate the US deficit entirely. He will not be pressed to explain this in the debate.
There are no Walter Cronkites in the new world of media where personal branding and professional/employer risk mitigation reigns supreme. In other words, Trump will not get grilled on hard, but very reasonable topics. Instead, we expect he will again be “off to the races” on ramble N+1.
Inflation should be better handled by Harris, who seems to go to the corporate greed playbook that is a loser in the middle even if it appeals to her base. Between Trump and Biden, only one of those two had to deal with the aftereffects of a combination of supplier chain fallout while taking fiscal action to stimulate jobs and demand (and thus inflation). Trump likes to pretend he did not put his lame duck signature on a Dec 2020 stimulus package paid out in Jan 2021.
If Trump wants to use COVID as his excuse, then that cuts both ways on “blame” and “excuses.” If Biden gets no credit for his need to prop up the economy and the demand side to react to COVID, then Trump can own the ugly contraction of 2020 in GDP and the job losses. He can be blamed for lighting the match on the “plague” by his slow, misleading responses. Trump always says, “more died under Biden,” but that is like blaming the lack of lifeboats for the sinking of the Titanic. Someone had to hit the iceberg first. Trump steered the ship from the COVID outbreak and spike in March 2020. At least be consistent. The COVID vaccine helped turbocharge demand. Most considered the vaccine good news, but demand came with it.
The positive reality of bipartisanship is that cooperation and compromise deliver good results for the economy (see Clinton and Reagan years) but eats into partisan aspirations for power and control and undermines autocratic ambitions.
The post-2000 growth of the US tells a story of stark partisan division and very slow growth. Trump has made it much worse.
Someone should ask each candidate who had better economies: Trump/Biden or Reagan/Clinton? No comparison. Not even close. Both the 1980s and 1990s were bipartisan success stories even with the excesses.