The race for the Democratic Presidential nominee remains crowded with eight candidates (as of this writing). Yet, with Super Tuesday just around the corner, the list of candidates is likely to be winnowed quickly. And one deciding factor that could make (or break) the decision for the Democratic Presidential nominee in July is likely to be a candidate’s economic policy.
But what exactly are the candidate’s positions and more importantly, why should they matter to savers and investors? In this week’s post we briefly explore some of the top candidate’s policies and provide an overview of their positions in the context of the current economic environment.
It is our opinion that (regardless of the candidate), the economic policies currently on offer are likely to be disruptive to the U.S. economy and financial markets should a Democrat clinch the presidency in November. Nevertheless, Election Day remains a long way away and we’ll have a better idea of the potential disruption to the economy (and markets) as we get closer to the summer conventions.
Economic policy: why does it matter?
So why should we care about economic policies, particularly as they relate to the election cycle? Well, put simply, political leaders can affect our quality of life through their ability to tax and spend. While the latest enacted key policy (Tax Cuts and Jobs Act of 2017) affected the economy in not so obvious ways, some policies can have more direct effects on our everyday lives, as we pointed out last week in our discussion on the SECURE Act.
The reality is that economic policies can affect the quality of the health care we receive, how much we pay for goods and services we use every day and the extent to which we can find and maintain gainful employment. Today, another generation of voters feel left behind as rising costs of living and debt burdens, notably those related to paying for college, have stifled their ability to get ahead in life financially.
To be sure, while some data suggest that labor markets conditions appear “tight” – with unemployment near multi-year lows and still positive payroll growth – the fact is that wage gains have barely outpaced inflation over the past decade. And simply put, some people feel that the rules have not worked in their favor and this election cycle Democratic politicians are offering up their own solutions to very real problems.
Candidate Economic Policies
It’s important to note that Congress typically is responsible for creating the rules (laws) that affect people’s lives. Nevertheless, the President, in some cases, can help set the legislative agenda and carry the baton on key, highly visible issues. Think the Affordable Care Act. Among many important topics, we believe that issues surrounding student debt, wages and jobs, health care and housing are likely to garner broad based attention from the electorate and the markets in the coming months.
Figure 1: Proposed Student Debt Policies
One issue that has perhaps affected an entire generation’s ability to get ahead in life financially is the burden of borrowing to pay for a college education. To this point, the amount of student loan debt has ballooned from less than $500 billion in 2006 to over $1.6 trillion in 2019. Arguably, this debt has hampered household formations among key demographics, most notably among the Millennial generation. So, what are some of the solutions being offered by Democratic candidates this election season?
Both Senators Elizabeth Warren and Bernie Sanders have proposed to eliminate student loan debt. Where their policies differ is that Sanders would do away with all outstanding student loan debt (all $1.6 trillion of it) while Warren would eliminate debt up to a certain limit and phase out the benefit for higher wage earners.
Other candidates like South Bend Mayor Pete Buttigieg would like to see debt eliminated for some borrowers in exchange for government service. Former New York City Mayor Michael Bloomberg and Senator Joe Biden would prefer options that fix existing issues with the student aid system, offering ways to lower borrowing costs but just short of all out-debt forgiveness.
Figure 2: Proposed Jobs and Wages Policies
Wages and Jobs
It has been well over a decade since laws governing the federal minimum wage have been reviewed. In fact, in 2007 Congress raised the federal minimum wage to $7.25 – a rate that is equivalent to a full-time annual salary of $15,080 – and well below the Department of Health and Human Services family of four poverty level of $26,200.
Today, there is broad consensus among Democratic candidates that the federal minimum wage should be at least $15 per hour and many have pledged to pursue legislation that would help increase workers’ earnings. Besides raising the minimum wage, what else have candidates suggested to improve employment opportunities for the American worker?
Well, candidates like Warren and Sanders have each introduced their own versions of a “New Deal”. Warren’s Economic Patriotism is focused on retraining the workforce to compete in a globalized economic environment. This includes scaling up apprenticeship programs and creating incentives for employers to offer other on-the-job training initiatives. Sanders’ Green New Deal meanwhile focuses more specifically on federally funded infrastructure, health care and education initiatives that would directly create jobs.
Bloomberg and Buttigieg have also proposed less-comprehensive programs that would create jobs by improving living circumstances and enhance infrastructure in rural and blighted areas across America. Biden’s focus, meanwhile, is less on introducing new programs than on fine-tuning already implemented policies. This involves focusing on strengthening workers’ ability to organize and generally increase workers’ rights.
Figure 3: Proposed Health Care Policies
Health care has been the traditional third rail in American politics for decades. This hasn’t changed in today’s election cycle and arguably has become more of a contentious point, especially at a time when health care costs continue to rise and at a considerable pace. This consternation comes as more people participate in the health care marketplace thanks to the Affordable Care Act. Yet, health care costs continue to increase as an aging U.S. population draws on more health care services. So what solutions are some candidates offering?
Well, some of the solutions vary from completely eliminating private insurers and expanding government programs like Medicare (a single payer option). This position is strongly held by candidates like Warren and Sanders. Bloomberg and Biden, on the other hand, oppose the idea of a single payer but would seek to expand coverage for Americans not currently eligible for Medicare. Either way, no one candidate has offered a quick fix to a very complicated (and costly) topic for many Americans.
Figure 4: Proposed Housing Policies
It has been well over a decade since the housing boom went bust, yet its aftereffects continue to live on. Indeed, housing has become an important issue, notably as home prices continue to move past housing-boom highs and instances of working homelessness continues to increase in different parts of the country.
What’s more, housing costs have risen at a pace faster than inflation over the past five years and have yet to show signs of abating thanks, in part, to the Federal Reserve’s not-QE money printing. Among some of the issues affecting affordability is the fact that quality affordable housing stock has dried up as jaded post-housing-crisis builders refrained from constructing lower priced homes, driving down housing affordability. Democratic candidates across the board agree that something should be done to address the current housing issues.
Solutions offered by candidates include everything from grants that incentivize localities to rehab and improve existing stock to federal funding to build more affordable housing. This camp includes candidates Sanders, Warren and Buttigieg whose plans consist of using federal funds to directly add to the housing stock in one form or another. As for Bloomberg and Biden, while they have expressed a desire to address the housing issue, they have focused their efforts on improving and expanding programs and zoning issues than on building more homes.
Figure 5: Paying for it all
Someone needs to pay for it
Finally, many of the programs proposed by the Democratic candidates require additional spending, some at trillion-dollar rates, over the next decade. This is a problem as the national debt today exceeds $23 trillion dollars and the Federal debt-to-GDP ratio has gone from 59% in 2000 to well over 100% today. What this means is that simply borrowing to pay for these economic policies will become progressively more problematic, especially at a time when growth in the U.S. economy is expected to slow. How would candidates pay for their proposed programs?
Simply put, most candidates have suggested raising taxes as a primary means to pay for their projects. Of note have been Warren and Sanders’ proposals to target the wealthy to fund their programs. Warren, for example, has offered an ultra-millionaire tax on wealth (rather than income) for the wealthiest 75,000 families in the U.S. Sanders similarly has his own Extreme Wealth Tax, that would require CEOs earnings more than 50x their employees to pay higher taxes as a way to fund spending on his social programs.
Bloomberg, Biden and Buttigieg have focused more on broadly increasing existing taxes rather than singling out any one social class or taxpayer. Bloomberg, for example, would like to roll back some of the TCJA benefits, raising the corporate tax rate back up to 35% from current levels of 21%. Biden would also like to increase revenues by taxing capital gains as ordinary income, raising the corporate tax rate and ending stepped-up basis rules.
Potential economic disruption?
The solutions offered by some of the Democratic candidates are in many ways a departure from current policy and certainly have the potential to be disruptive to the financial markets and economy. Why? On the one hand, an elimination of student debt could act as a massive form of fiscal stimulus, in some cases substantially increasing the amount of disposable income available to younger households who have a greater propensity to spend. Increased certainty over health care, employment and housing could also give households the confidence they need to make long-term spending and saving decisions.
On the other hand, someone will need to pay for the additional costs associated with some of the proposed programs. And while financial markets cheered the TCJA, its effects on the economy, notably as they related to tax cuts, have yet to show major benefits to the overall economy. Nevertheless, reversing some of these benefits, particularly raising corporate taxes, could be perceived negatively by the financial markets as corporate earnings decline as taxes increase. What’s more, business hiring and investment activity could slow in the short-run as business leaders put off spending decisions as policy uncertainties linger.
Assuming a Democrat wins the White House, over the long-run, the outcomes will further depend on a number of factors, including the composition of Congress following elections and the political will to implement some of the large-scale projects. Make no mistake, topics like housing, health care, wages and paying for college are issues that are likely to remain relevant for years and will need to be addressed sooner rather than later.
As for the degree to which candidates’ policies will disrupt the U.S. economy, we believe that the outlook will become clearer as we move past conventions in the summer. Even so, some of the same policies that have gotten us to this point will need to at least be addressed by our political leaders, regardless of whether a Republican or Democratic president is at the helm post-November.