What Happens Next
During elections, I am often asked to weigh in with an opinion on how the market will respond to one party winning versus the other. I dutifully answer but do so knowing that I am not being asked a question. Instead, I am merely validated that an individual’s preference is ultimately better for the country.
By better, that usually means economically speaking especially in terms of market performance. Information reinforcing their view is embraced; contrary opinion ignored.
So now that we have cast our votes and our pre-election partisan filtering is no longer important, I’d like to revisit the question: which party is better for the markets?
My answer might surprise as it turns out that neither party has the edge over the other in terms of captaining the good ship America in my opinion.
Once an election is over, the market’s direction will be determined by the outlook for the economy. No administration can institute policy that results in meaningful change to the economy in the short term.
Our founders made sure that progress moves slowly in this country. Since no administration is going to be able to immediately enact meaningful policy changes no matter who ultimately wins, the trajectory of the economy is all that matters today.
You’ve seen this play out in the market in the immediate aftermath of the election. Investors react favorably to exceptionally low interest rates, the economy is poised to continue to rebound as the pandemic abates, and a resurgence in American manufacturing from the tax cuts enacted a few years ago remains likely.
So long as those forces form the backdrop to the economy, I expect market conditions continue apace.
But let me pose a different question: which party’s policies are better for the U.S. economy over the long-term?
Both parties have found it effective to focus platforms on a fixed menu of issues that, according to general polling, will have the most appeal to their voters. None of these “red meat” issues address economic policies nor their effect on our long-term economic health.
For those voters worried that one particular party may harm our long-term economic viability, history should put you at ease. It turns out that in the years since World War II, the two dominant political parties in America are essentially indistinguishable policy-wise.
That may be counterintuitive since we’re all told constantly how the parties are different. In reality, they are primarily the same due to members regularly crossing party lines enacting policies typically attributed to the other side.
For example:
Eisenhower used Administrative preeminence on matters of national defense and built the interstate highway system.
Kennedy implemented tax cuts to stimulate economic growth.
Johnson signed the Medicare Act of 1965 with almost half the Republicans in the House and Senate supporting the bill and many Democrats in both chambers voting against it.
Nixon stepped up Federal oversight of all business by forming the Environmental Protection Agency. He then took the extraordinary step of implementing price controls on a host of privately manufactured goods to combat inflation.
Carter deregulated the airlines.
Bush (the first) raised taxes.
Clinton cut taxes, and enacted reforms in the welfare system that limited its availability.
You get the idea. In practice, the economic policies of one party versus the other are often indistinguishable, at least in a way a voter can say they have a clear choice. Both parties have implemented similar tools to achieve policy goals, and until very recently those policies received support and opposition across party lines.
One key “post-WWII” policy balance has been in each party’s view of our role in the world. That view was shaped by the failure of the international response to the end of WWI. At the end of that war, the victors imposed onerous economic reparations on the vanquished via the Treaty of Versailles. The seeds of discontent that followed gave root to the second World War.
That painful lesson would not be repeated by the Allied powers in 1945. Instead of punishing the Germans and Japanese, the policy was to rebuild. As the last major economy left intact by the war, countries needing goods had little choice but to buy from the United States.
Because of this, the U.S. enjoyed a unique period of economic growth through the 1950s. Virtually all U.S. workers could find a job, with good wages. Such conditions contributed to the building of the American middle class.
Helping to fuel the cycle of growth was a government policy of lending or granting money outright to devastated countries. The purpose was to accelerate rebuilding and that policy worked.
By the mid-1960s, the world’s ability to produce goods was restored and global competition increased. Our preeminence as the supplier to the world dissipated. Over time countries with inexpensive labor provided manufacturing capacity at a cost that was more attractive than what was offered at home.
As a result, income growth in the United States slowed to a crawl and has remained stubbornly slow to this day. Fortunately, the middle class has hung tough, but doing so required sacrifice including two-income families for example. While gender equity was a social imperative, economic need proved to be a greater motivator for bringing women back into the workforce.
I am a globalist. I believe for a host of economic, social, and political reasons, we should be committed to global trade. However, it is also true that the post-WWII policies of rebuilding morphed into policies granting unbalanced favor to our trading partners over our production. Over the long-term, an economy that cannot competitively produce goods will decline.
True free trade means “balanced.” Labor and environmental law differences for example may give advantages to one nation over another. Over the last two decades, we’ve been witnesses to the consequences of unfair trade in the United States.
Most disheartening has been the decline of small-town America. As city after city saw main streets crumble, politicians from both parties sat idly by. What should have been the canary in the coal mine was ignored as the outcome was brushed off as unavoidable.
We should no longer make our markets accessible if a similar offer is not made by our trading partner. That’s not favoring one side or the other, it’s simply leveling the playing field. Doing so will result in sustainable economic growth including wage growth for the middle class.
The other issue we must face to ensure our long-term economic health is our national debt. Once again, no one party is responsible for the explosion of debt in America. Both parties have contributed to the growth of our national debt over the years.
We as ordinary citizens are also to blame for ignoring this ticking time bomb. If the government can spend by borrowing, they do so without taxing us. It’s a matter of having your cake and eating it too. We have all conveniently ignored what is going on.
As it sits today in my opinion, there is only one way to address our nation’s debt that does not cause us economic harm: we must grow the economy. No other policy prescription solves the problem of having too much debt. You could tax all the wealth in the nation and the problem remains.
That’s just the math.
Both parties must embrace policies that allow private enterprises to thrive and grow. Only by growing our economy will our nation’s debt not become a problem for future generations.
And I want to say in conclusion, that I do not ignore issues surrounding the social and environmental concerns shared by many Americans, but I feel those issues get their fair hearing in our public discourse. I advocate for issues central to our long-term economic health because without a vibrant economy many of these other issues will suffer as priorities.
A strong economy is essential to all that we value no matter who ultimately holds power in government. It’s essential to everything else we want.