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A Hitchhikers Guide to the US Presidency

October 2020
 

By Bob Cunneen, Senior Economist and Portfolio Specialist, MLC Asset Management
 

“To summarize the summary: anyone who is capable of getting themselves made President should on no account be allowed to”.
A Hitchhikers Guide to the Galaxy


The world’s oldest continuous democracy makes a profound choice on November 3rd. Donald Trump’s unique maverick approach to the US Presidency – communicate key policy changes by Twitter and denounce the media as “fake news” – faces a formidable challenge from a conventional politician in Joe Biden. The initial economic gains in the first three years of the Trump Presidency have been devastated by the Coronavirus in 2020. The rapid spread of infections and tragic loss of lives – more than 220,000 Americans – makes President Trump’s handling of this “Virus Crisis” the key issue in 2020.

To gain the White House, the successful candidate must navigate a minefield of technical hurdles. The first key challenge is to get your supporters to be registered and to vote, as the US has a voluntary system. Secondly, there is only a limited number of physical voting locations. One way to avoid the long queues, as well as mitigate the virus risk, is to make a postal vote. However, this is a contentious issue as seen in Trump’s accusations of “voter fraud”. Thirdly the Presidency is not decided by an outright majority of US votes but by winning the Electoral College. The 538 Electoral College votes are typically “winner takes all” for each individual state with two exceptions. So winning the Presidency depends on the distribution of your voting support across the states. Hence Presidential campaigns frequently focus on the key battleground states such as Florida (29 Electoral College votes), Michigan (16), Ohio (18) and Pennsylvania (20). This explains how President Trump prevailed in 2016 by winning keys states despite receiving less votes than Hillary Clinton.
 

Can one forecast November’s election outcome?


Commentators and pollsters have tried to forecast elections with a variety of techniques. Voting polls, statistical models, as well as betting markets odds have been employed to predict how the cards will be counted on election day. However, these various prediction methods have a mixed track record. The remarkable 2016 result of Donald Trump being elected when the polls favoured Hillary Clinton has seen many observers question the accuracy of polls. This issue may be exacerbated by the larger than normal postal vote in 2020.

However, history does give some guidance on whether a current US President is likely to win a second term. These four decision rules come from examining the last 40 years. There have been six US Presidents from 1980 to 2012 who have sought a second four-year term. There have been two notable failures to get re-elected in Jimmy Carter (1980) and George H.W. Bush (1992). A common feature of the Carter and Bush re-election failures was that a recession occurred in the prior two years before the election. The ‘blame game’ applies if a recession occurs on the President’s watch. President Trump has recorded a recession during this final year of office, making a X negative against his re-election chances.1

In the 1980 Presidential debate, the challenger Ronald Reagan asked voters to answer the simple question: “Are you better off than you were four years ago?” This has proven to be a key litmus test and has been surveyed by Gallup since 1984.2 Voters are more willing to keep a politician in office if their experience has been beneficial. The threshold for “better off” and getting re-elected is 42% is also the answer for the “great question of life”.3 In 1992, G.H.W Bush failed with a “better off” rating of only 38%. In this turbulent 2020, President Trump has an astonishing score on this criterion. The latest September poll shows Trump with a 56% “better off” rating, giving a supportive ‘YES’ to re-election.


Table 1 – Re-election litmus test

Presidents seeking re-election Carter
1980
Reagan
1984
Bush G.H.W
1992
Clinton
1996
Bush G.W
2004
Obama
2012
Trump
2020
No Recession in past two years before the election    X  YES X YES YES YES X

“Are you Better Off” greater than 42%

Not available YES X

YES

 

YES

 

YES

 

YES

 

Job Approval Rating is greater than 42%

X YES X YES YES YES YES

Poll Rating margin greater than +3%

X YES X YES X X X

Source: MLC Asset Management Services Limited, NBER (National Bureau of Economic Research) and Gallup.


The third decision rule is whether the President’s approval rating is also above 42%4 Both Carter (37%) and Bush (34%) had approval ratings well below this 42% threshold. The Gallup poll has Trump at 44%, so this is a Yes favouring re-election. The final and most contentious rule is poll margins. Given the large margin of error with polls, the President requires a support margin of at least 3% to be returned to office. Here President Trump is clearly struggling by being 8% behind in the polls to the challenger Joe Biden. So, a negative X is recorded.

The final column shows that President Trump has only two indicators pointing to re-election in the “better off” and “job approval” responses. The threshold for both these criteria are low at 42%, suggesting these tests have been generously marked to suggest Donald Trump will stay in the Oval Office. However, two other historical criteria are set against Trump being re-elected – a recession within two years of the election and that President Trump does not have a 3% margin in his favour but is well behind in the polls.
 

Are there major economic policy differences between the two candidates?


President Trump’s economic ambitions for the next four years is a replay of 2016 – “Cut Taxes to Boost Take-Home Pay, Keep Jobs in America, Enact Fair Trade Deals that Protect American Jobs” and "Made in America Tax Credits”. However, there is no material detail provided by the Trump campaign team on the financial impact of these pledges. There is a US $1 trillion infrastructure spending package proposed. Yet this promise of better power and transport services is a repeat of the 2016 campaign promise that never arrived.5

The Democrat challenger in Joe Biden has provided marginally more detail on the economic plan, although the costings of each proposal is debatable. To provide a more objective assessment, the University of Pennsylvania (PWBM) has provided some analysis. Notably this is the same university that Donald Trump graduated from in 1968. The PWBM analysis “finds that over the 10-year budget window 2021 - 2030, the Biden platform would raise $3.375 trillion in additional tax revenue and increase spending by $5.37 trillion.”6

So, “Biden’s Plan” is essentially a higher taxing and spending Federal Government footprint compared to President Trump’s pledges. One aspect of the Biden Plan that could cause consternation for Wall Street is the proposal to raise the corporate tax rate from 21% to 28%. This would reverse half of the corporate tax cut from 35% to 21% in 2017 by President Trump and the Republican Controlled Congress.  Proposals for increased taxes for higher income earners are also advocated under the Biden Plan.   

There are some differences in terms of labor and trade policies but there is a consensus to be tougher on China. President Trump aims to impose tariffs and prohibit government contracts to companies that outsource to China while providing tax credit incentives to bring jobs back to the US. The Biden plan aims to claw back tax benefits to companies that send jobs overseas as well as more assertive action on countries that engage in unfair trade practices. Biden also proposes that countries that fail to “meet their climate and environmental obligations” will have a fee placed on their “carbon intensive goods”, suggesting that China will be targeted. Another key difference is that Biden plans to raise the Federal minimum wage from US$7.25 to $15 per hour. President Trump has stated he will “consider this”.
 

Table 2 – Biden’s economic plan

Topic

Proposal

Budget impact

 Corporate taxes

Raise tax rate from 21% to 28% and impose 15% minimum tax on book income

US$ + 1,439 bn

= 7% GDP

Individual taxes

Raise tax rate from 35% to 39.6%  and apply 12.5% social security tax on income earnings greater than $400 thousand

Tax capital gains and dividends at 39.6% on earnings greater than $1m

+ 1,936 bn

= 10% GDP

Education spending

“Make public colleges and universities tuition-free for all families with incomes below $125,000 as well as raise teacher wages in public schools”

-1,900bn

= -9.5% GDP

Infrastructure

New investments in: water, high-speed rail, clean energy and “Breakthrough” tech R&D, eg 5G and artificial intelligence

-1,600bn 

= -8% GDP

Housing

Expanding the Low-Income Housing Tax Credit, incentives to build affordable housing  and  to support low-income housing

-650 bn 

= 3.25% GDP

Source: University of Pennsylvania (PENN Wharton Budget).


The Biden plan has more fiscal stimulus compared to Trump. Yet a President’s power is constrained by the “checks and balances” within the system by the Congressional powers as well as judicial review by the Supreme Court. A clean sweep by one party – gaining the Presidency as well as majorities in the Senate and House of Representatives is the ideal for implementing economic policy. However, in a deeply polarized country, achieving this majority across both the Senate and the House is a tough ask. So even if Joe Biden is elected President and advocates these ambitious changes in taxes and spending, Congress ultimately controls the budget.

The critical question then is will the new President have support from both the Senate and House of Representatives to pass these campaign promises. Currently the Senate is controlled by the Republican Party in a 53-47 majority. The Democrats would need to win another 3 Senate seats amongst the 35 seats being contested in 2020 to take control of the Senate. To avoid a filibuster – the long winded speaking measure to delay or derail legislation being passed – the Democrats would need a super majority of 60 seats in the Senate. For the House of Representatives, all 435 seats are to be decided on November 3rd. For the Democrats to implement the “Biden plan”, they must win 218 seats in the House of Representatives, gain more than 50 seats in the Senate as well as win the main title fight for the White House.
 

Could a contested Presidential Election result see the winner only decided by the Supreme Court?


Given the mixed signposts for President Trump in the historical criteria above, the possibility of a close and contested 2020 election result is a distinct possibility. President Trump’s combative character also suggests that the election result may be disputed. The importance of obtaining voting majorities across key states to win the Electoral College as well as the increased number of postal votes provides greater scope for the Presidential result to be contested. Any discrepancies could provide evidence for a legal challenge by the losing candidate. The spectre of a Supreme Court challenge which repeats the 2000 Bush - Gore “hanging chads” debacle would be very concerning for investors. After the 2000 election, there was a one-month delay before the Supreme Court’s ruling on December 12th. If 2020 is a repeat of the contested election of twenty years ago, Wall Street could experience sharp swings in share prices. A constitutional crisis would also impact the US government and corporate bond market as financial markets struggle to weigh up both the economic and political implications. Clearly a decisive landslide margin in favour of one Presidential candidate and a supportive Congress would be the preferable constitutional and investment outcome.

Essentially US presidential elections have a history of dramatic twists and turns. However, investors should recognise that politics is just one factor amongst many that can influence their investments. Political events can often prove to be just noise rather than the signal that requires a response. Taking a disciplined long-term approach to investing requires an intense focus as well as resilience. MLC’s investment team will be actively managing portfolios over coming months to take account of these possible political risks.

 

1 This rule is adapted from research done by the Yale economist Ray Fair who focused on economic output in the prior 3 quarters to the election. See https://cowles.yale.edu/newsletter/items/predicting-next-president
2 Gallup is a US analytics and advisory company. See their website article “Most Say They Are Better Off Now Than Four Years Ago”, September 2020. https://news.gallup.com/opinion/gallup/321650/gallup-election-2020-coverage.aspx
3 The 42% percentage threshold is inspired by the super computer Deep Thought in the science fiction novel “A Hitchhikers Guide to the Galaxy” by Douglas Adams.
"The Answer to the Great Question...Of Life, the Universe and Everything..." said Deep Thought  "Is..."  "Forty-two," said Deep Thought, with infinite majesty and calm.”
4 Gallup has noted that for Presidents seeking re-election “all incumbents with an approval rating of 50% or higher have won reelection, and presidents with approval ratings much lower than 50% have lost.” https://news.gallup.com/opinion/gallup/321650/gallup-election-2020-coverage.aspx
5 President Trump economic plan. See https://www.donaldjtrump.com/media/trump-campaign-announces-president-trumps-2nd-term-agenda-fighting-for-you/
6 Joe Biden economic plan has been reviewed by the Penn Wharton Budget Model at the University of Pennsylvania. https://budgetmodel.wharton.upenn.edu/issues/2020/9/14/biden-2020-analysis

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