The Lesser of Two Evils (Part 1)
How the Election Could Impact the Economy & International Relations (P1)
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Abstract: The U.S. democracy is grappling with significant challenges, including political polarization, judicial biases, ineffective legislatures, and flawed electoral systems. These internal issues are compounded by external interferences, social fragmentation, and economic instability. With the presidential debate approaching, there are concerns about how well Biden can perform given that Trump is leading in the polls. Despite Trump's conviction, his support remains resilient, largely driven by low-information voters. Suburban areas and pivotal states like Arizona play crucial roles in shaping the election outcome. Market experts suggest that a Trump victory could lead to significant changes in trade policies and fiscal stimulus, driving higher inflation and impacting Federal Reserve policies. Conversely, Biden's administration is expected to focus on green energy, infrastructure, and near-shoring, each with varying sectoral implications. Election uncertainties may lead to market volatility. Internationally, Trump's "America First" approach strained relations with European allies and led to withdrawals from international agreements. Trump’s potential re-election could exacerbate social fragmentation and polarization within the U.S., influencing global democratic norms and emboldening populist and authoritarian leaders.
Do Debates Matter Anymore?
Presidential debates have long been a staple of U.S. election campaigns, but their significance in shaping voter decisions has been a subject of debate itself. Viewership trends indicate that debates still draw considerable attention, often second only to events like the Super Bowl. For instance, the first Trump-Biden debate in 2020 attracted over 73 million viewers.
However, the impact of these debates on voter decisions is more nuanced. While a majority of voters find debates helpful, with 70% saying so in 1992, only a small fraction make their final decision based on them. For example, in 2016, only 10% of voters decided during or just after the debates, with many deciding much earlier or closer to Election Day. Despite these mixed outcomes, debates remain a critical platform for candidates to present their policies and personalities, offering voters a unique opportunity to compare them directly.
A pressing question still remains: how will two senior citizens, sans a little pharmaceutical pick-me-up, manage to stay sharp and coherent past 9 pm? Historically, both Biden and Trump have managed to summon surprising levels of energy, though it’s often been channeled more into verbal sparring than into substantive political discourse.
The first presidential debate between Joe Biden and Donald Trump in 2020 was particularly notable for its high level of contention. Moderated by Chris Wallace of Fox News, the debate covered a range of topics, including the Supreme Court, COVID-19, the economy, race and violence in cities, and the integrity of the election. The debate was marked by frequent interruptions, primarily from Trump, who interrupted Biden and Wallace numerous times. Both candidates engaged in personal attacks. Trump often challenged Biden's intelligence and accomplishments, while Biden called Trump a "clown" and told him to "shut up" at one point. Wallace faced significant challenges in maintaining order and ensuring both candidates adhered to the rules.
Historically, there have been several periods when presidential debates were notably contentious. Here are a few key examples:
The 1980 Reagan-Carter Debate: The 1980 debate between Ronald Reagan and Jimmy Carter was marked by Reagan's famous line, "There you go again," which he used to dismiss Carter's criticisms. The debate was a pivotal moment in the campaign, highlighting Reagan's communication skills and helping to solidify his lead.
The 2000 Bush-Gore Debates: The 2000 debates between George W. Bush and Al Gore were characterized by interruptions and pointed criticisms. Gore's audible sighs and Bush's pointed barbs were heavily scrutinized by the media and the public.
Though it wasn’t until recently (e.g., Donald Trump vs. Hillary Clinton) that the language used during presidential debates became particularly combative. Trump's frequent interruptions and personal attacks were a significant departure from traditional debate decorum, leading to a more confrontational atmosphere.
The upcoming debate is, and should be perceived as, unprecedented, featuring a sitting president against a former one. Biden is currently behind in the polls. While the overall impact this first debate will have on the candidates and the election is yet to be determined, Biden needs to do well if he wants a strong shot at a second term. For example, the first debate between Barack Obama and Mitt Romney saw Romney, who was aggressive and assertive, in contrast to President Obama, who was criticized for appearing passive and less engaged, win the debate. Romney's performance was seen as a game-changer, revitalizing his campaign. Though he went on to lose, Romney's strong performance led to a significant bump in the polls, something that Biden sorely needs.
Below we examine the current election outlook.
Part 1: Current Election Outlook
Intro: In analyzing the current political landscape in the United States and the outlook for the upcoming election, I draw from a series of reports and data-driven analyses by Patrick Ruffini. These reports include "The Verdict and the Data," "What's Changed Post-Conviction?," and the "Forecasting Dealer's Choice.” Each of these documents offers a nuanced view of voter behavior, political trends, and key factors influencing the 2024 election.
Election Dynamics Post-Trump Conviction
Trump’s guilty verdict resulted in only a minor 2% drop in his chances of winning, attributed to low public engagement with the trial. Voter behavior appears more influenced by broader perceptions of Trump’s presidency rather than specific legal outcomes. Ruffini also highlights the significant role of low-information voters in this context.
Low-information voters, who are less engaged with detailed political developments, could shift their support based on general impressions and media portrayals. Voters are more likely to remember Trump’s overall conduct rather than specific events like January 6th or his handling of COVID-19. However, Matthew Continetti of the American Enterprise Institute notes that, Trump's recent felony conviction appears to have negatively impacted his support among independents. Yet, he remains competitive in swing states crucial for electoral victory, albeit with tightening margins.
The fluctuating support from independents, highlighted by their recent swing from a 2-point preference for Trump to a 9-point favor for Biden in the June Fox News poll, illustrates the uncertainty and fluidity of their allegiance. Historically, the candidate who wins independents often wins the election, as seen in 7 of the last 10 biannual elections, though there are exceptions like 2004 and 2012. The ongoing challenge for Republicans, as evidenced by losses in the midterm elections, is to recapture the support of independents disillusioned by Trump-endorsed candidates.
Overall, prediction markets and recontact surveys consistently show a minimal shift in the presidential ballot post-verdict, indicating a resilient support base for Trump. This stability highlights a broader realignment within the Democratic and Republican bases. Democrats increasingly rely on college-educated voters who exhibit higher levels of trust in democratic institutions. In contrast, Republicans gain ground among low-trust voters, including significant segments of Black, Latino, and young voters.
Forecast Models and Suburban Shifts
Election forecast models from The Economist and FiveThirtyEight currently show Trump as a slight favorite, marking a shift from 2020 when models favored Biden. Differences in these models lie in their methodological approaches, particularly in weighing uncertainties and various "fundamentals." The political landscape of America's suburbs, traditionally swing regions, shows significant shifts influenced by demographic changes and evolving social issues. Suburban areas' political orientation could be decisive in the 2024 election, given their historical role as battlegrounds for both parties.
Part 2: Impact of Election on Markets
(Sources: Axios, Forward Guidance)
The upcoming U.S. presidential election has significant implications for the country's fiscal policies and the global economy. Sixteen Nobel prize-winning economists have expressed concerns over former President Donald Trump's economic plans, suggesting they could reignite inflation and cause lasting harm to the global economy.
Nobel Laureates' Warning
Sixteen Nobel laureates, including Joseph Stiglitz and Claudia Goldin, have warned that Trump's plans would have a negative impact on the U.S. economy. They argue that his proposals, such as imposing new tariffs and fiscally irresponsible budgets, would reignite inflation and destabilize the domestic economy. The economists highlight the importance of considering the future plans of both candidates rather than solely reflecting on their past records.
Biden's Economic Strategy
President Joe Biden's administration emphasizes fiscal spending on infrastructure, green energy, and social programs. These policies aim to stimulate economic growth and address long-term structural issues. Biden's focus on near-shoring, particularly to Mexico, supports manufacturing and logistics sectors, potentially benefiting the U.S. and its trade partners. Additionally, Biden proposes raising the corporate tax rate to 28%, quadrupling the stock buyback tax, and eliminating certain tax subsidies, aiming to create a more equitable tax system and generate revenue for public investments.
Trump's Economic Strategy
If Trump wins, some analysts expect significant changes in trade policy and fiscal stimulus through tax cuts and increased spending, which could lead to higher inflation. This aligns with the Federal Reserve's concerns about inflation remaining above target, as highlighted by Jay Powell's comments. Powell noted that the Fed is grappling with persistently high inflation and the possibility of it staying in the 3-4% range due to various factors, including fiscal policies and wage growth. They highlight a potential 10% tariff on all non-U.S. made goods and a 60% tariff on specific Chinese goods. This could lead to a steepening of the yield curve (twos-tens steepener) due to the inflationary impact of such policies, combined with pressure on the Federal Reserve to lower interest rates. They anticipate that the bond market might react by reducing short-term rates while long-term rates could remain stable or rise.
Long-Term Economic Outlook
The long-term economic outlook depends on the sustainability of growth and the Federal Reserve's response to structural changes driven by fiscal policies. If either candidate's policies lead to sustained economic growth, the Federal Reserve might need to adjust its long-term neutral rate upwards, reflecting a new equilibrium in the economy. This adjustment would balance growth with inflation control, ensuring economic stability.
Part 3: Election Impact on International Relations
During his presidency, Donald Trump's foreign policy stance with the U.S. and its European allies could be characterized as more distant and often confrontational rather than close and collaborative. Though to clarify, I’m offering no opinion on if these actions are correct or not. Here are some key moments sourced from the Council on Foreign Relations:
America First Policy: Trump's inaugural address emphasized an "America First" approach, focusing on reducing U.S. trade deficits and rebalancing burden sharing within alliances. This marked a shift towards prioritizing U.S. interests over cooperative international engagements.
TPP Withdrawal: Trump withdrew the U.S. from the Trans-Pacific Partnership (TPP), signaling a move away from multilateral trade agreements that were a hallmark of previous administrations.
Paris Agreement Withdrawal: By withdrawing from the Paris climate accord, Trump distanced the U.S. from a significant international effort to combat climate change, which was supported by many European allies.
NATO Relations: Trump’s interactions with NATO were marked by demands for increased financial contributions from member states and reluctance to explicitly endorse NATO’s mutual defense clause (Article 5) initially. This created tension with European allies who saw the U.S. commitment to NATO as crucial.
Trade Wars: The imposition of tariffs on steel and aluminum, including on EU countries, and the broader trade war with China, strained relationships with both European and Asian allies who were affected by these measures.
UN Human Rights Council Withdrawal: The U.S. withdrawal from the UN Human Rights Council, citing bias against Israel and the presence of countries with poor human rights records, further indicated a retreat from multilateral diplomatic engagements.
Mixed Messages and Diplomatic Tensions: Trump's policies often sent mixed signals. For instance, while reinforcing ties with Saudi Arabia despite the murder of journalist Jamal Khashoggi, Trump’s administration also withdrew troops from Syria, leading to a Turkish offensive against Kurdish forces, which caused concern among European allies about stability in the region.
Support for Authoritarian Leaders: Trump’s apparent favor towards authoritarian leaders like Russia’s Vladimir Putin, including a controversial private meeting and subsequent press conference in Helsinki, undermined traditional U.S. alliances with European democracies.
Strategic Documents and Military Decisions: The strategic documents released during Trump’s tenure identified China and Russia as major competitors, which influenced military and diplomatic postures. Additionally, the reduction of U.S. troops in Germany was justified as a measure to enforce NATO commitments but was seen by many as a weakening of the alliance's deterrence against Russia.
If Donald Trump were to be elected president in the 2024 election, several potential impacts on the economy and international relations could be anticipated, based on his previous administration's policies and current geopolitical trends…
Middle East Policies:
Support for Israel: Trump's administration was known for its strong support of Israel. A new term could see continued military and diplomatic backing, potentially heightening tensions in the Middle East, particularly with Iran and its proxies.
Withdrawal from International Agreements: Trump might continue to withdraw the U.S. from international agreements, as seen with the Paris Climate Accord and the Iran Nuclear Deal. This could lead to further isolation of the U.S. on the global stage and create vacuums that other powers, like China and Russia, might fill.
NATO and European Allies:
NATO Dynamics: Trump's critical stance on NATO could lead to further strain on transatlantic relations. His demands for increased defense spending by NATO allies could continue, potentially leading to friction within the alliance. However, European countries might respond by increasing their defense budgets,
Social and Political Impact: Domestic Polarization
Social Fragmentation: Trump's election could exacerbate existing social and political polarization in the U.S. His policies and rhetoric have historically divided public opinion, leading to heightened social fragmentation and internal conflict.
Impact on Democratic Institutions: Concerns about the erosion of democratic norms and institutions might intensify. Issues related to judicial independence, media freedom, and political corruption could become more pronounced.
Global Democratic Trends:
Influence on Global Democracies: Trump's presidency could influence other democracies worldwide. His approach to governance and international relations might embolden populist and authoritarian leaders, potentially undermining democratic norms globally. Like Brazil’s Jan 8th insurrection.
Looking Back to Look Forward:
The divisiveness of our current political landscape, coupled with divergences in historically social, cultural, and political trends among our conceptualizations of gender, race, and socioeconomic status (SES) relative to political affiliation and ideological outlook, has left our democracy more nuanced and subsequently trending towards instability.
We’ll see what issues are addressed or not during the debate. Zooming out, this political turbulence, of course, can be exacerbated during certain inflection points like we’ve previously discussed. With the war in Ukraine, Israel’s expanding conflict, & growing tensions around Taiwan and the South China Sea, this election may feel like it will coincide with upcoming inflection point. However, if memory serves correct, didn’t Biden vs. Trump (Round 1) & Clinton vs. Trump feel like inflection points? Looking back, the historic election of the first black president is what some academics argue as the most potent inflection point for the intensification of this polarizing trend. "The Tribalization of Politics: How Rush Limbaugh's Race-Baiting Rhetoric on the Obama Presidency Paved the Way for Trump" by Ian Reifowitz explores how right-wing media figures, particularly Rush Limbaugh, used Obama's presidency to fuel racial and cultural divisions that ultimately contributed to the rise of Trump. Reifowitz argues that the rhetoric employed by Limbaugh and similar commentators framed Obama as the "other," stoking fears and prejudices that aligned with Trump's political messaging.
As we examine the present-day challenges, it becomes evident that these issues are not isolated but rather part of a broader continuum of political and social dynamics. In the United States, economic inequality and unemployment remain significant concerns. The 2008 financial crisis and the subsequent recession had a profound impact on public confidence in financial and governmental institutions. The rise of populist movements on both the left and the right reflects broader dissatisfaction with the status quo and growing polarization within society. However, to think that we are reaching another inflection point may be more anxious thinking than data based thinking (though anxiety about the future may be a good motivator for voters and social movements generally). While the probability of global instability and conflict is generally low, a common theme we’ve been discussing is the need for an awareness that it’s possibility is, nevertheless, increasing.