The First Article in a Two-Part Series on Economic Policies of the Presidential Candidates From Both Parties. Next: The Republicans.
By Martin Hutchinson
With the Iowa caucuses looming immediately after the New Year's holiday it's worthwhile for investors to take a break from their trading triumphs and focus on politics. It's worth taking the time to determine which politicians might make your life easier, and who might be grasping at your hard-earned profits.
And let's be honest: It's worth a look to see if we can figure out how to capitalize on the election results – whatever they may be.
In this piece, I am going to look at leading Democratic candidates, Hillary Rodham Clinton, John Edwards and Barack Obama. Then, in my next piece, I shall look at the large-and-confused Republican field, in which Rudy Giuliani, Mike Huckabee, John McCain, Ron Paul, Mitt Romney and Fred Thompson each have their strengths, yet none can be regarded as a true front-runner. Unlike some previous years, there is little overlap between the economic policies of the two parties, yet the candidate who emerges from each party can potentially affect the long-term U.S. economic outlook as much as the ultimate victor of the November 2008 presidential election.
A Wide Open Election
For voters, this is shaping up to be one of the most confusing elections in many years. For one thing, there is no incumbent. And neither party has a clear front-runner, whose upset would come as a major shock [although in a FoxNews poll released yesterday (Thursday), Democrats back Clinton over Obama 49% to 20%].
Back in the 2004 presidential primaries, only the Democrats had a competitive contest; in 2000, both George W. Bush and Al Gore were almost completely assured of their respective parties' nominations – fully 18 months before the election.
But this time around, the Democrat field is fairly open and the Republican field completely open, with no clear front-runner at all. There looks to be a very good possibility that we will not be done with primary electioneering on the "Super Tuesday" of Feb. 5, but that each later primary contest will be meaningful right up to the end. In fact, it's even possible we'll end up with a brokered convention for one of the candidates – in August for the Democrats, or early September for the Republicans – with deals being done in back rooms, and only the lack of cigar smoke to remind us that we are not about to elect as president.
Let's turn to the candidates.
Dialing for Democrats
Hillary Clinton is by far the most vague about her economic proposals. She would remove the Bush tax cuts on incomes over $200,000, but has not said what she plans to do about Social Security or for the highly problematic AMT). Her support of a "cap-and-trade" carbon-emissions-permit scheme to combat global warming should provide substantial additional government revenue, even as it boosts costs for business.(
On the other hand, Sen. Clinton plans two new tax credit schemes for education and retirement saving, both of which would be expensive. In terms of government spending, her healthcare plan is comprehensive, but she won't commit to removing troops from Iraq before 2013. That means she has a diminished ability to pay for healthcare without substantially higher taxes.
Clinton opposes all the recent free trade agreements except for the Peru deal, which passed the Senate recently by 77-19, and has said the NAFTA) needs to be "revisited."(
John Edwards, fairly centrist during his Senate career, is running as the out and out populist this time. He plans to remove the Bush tax cuts and institute Social Security contributions for those with incomes of greater than $200,000. And he supports the AMT tax-reform plan of U.S. Rep. Charles B. Rangel (D-NY), which would raise income tax on high earners by another 4.6%. As a result of Edwards' two proposals, high-earners would see their marginal tax rates increase from the current 35% to 50.2% — and actually more than 60%, if state taxes are included. This huge increase would certainly have an adverse supply side effect.
Edwards is also running as the populist on trade. He maintains that the entire U.S. trade deficit can be eliminated with three key moves:
- By imposing anti-dumping duties on China.
- By boosting conservation and with domestic-energy sourcing [although he opposes nuclear power].
- And through greater trade retaliation.
Since Edwards would pull our troops out of Iraq immediately, and proposes more tax increases than Hillary Clinton, an Edwards-led administration would presumably run a smaller budget deficit – excluding the probable substantial adverse economic effects of his tax-and-trade proposals.
Barack Obama is campaigning to Clinton's left when it comes to Iraq [he wants to get out more quickly], but he is more moderate when it comes to his economic policies.
Obama contends that economic growth since 2000 has gone almost entirely to the top 5% of the population, and therefore wants to direct tax cuts toward moderate-income earners. However, he is opposed to "class warfare" rhetoric, or taxation. While favoring ending the Bush tax cuts for taxpayers with incomes in excess of $200,000, introducing social security contributions on high incomes and favoring the Rangel plan to replace the AMT, he recognizes that if all three changes are made, marginal tax rates would soar – meaning some compromise must be found.
Obama's healthcare proposal is less expensive than those of Clinton or Edwards because its "universal mandate" would extend only to children. Further, he recognizes the ability of market incentives to reduce costs, and wants to avoid federalizing U.S. healthcare. Like other candidates, he favors a "cap-and-trade" carbon-emissions-permit system, but he regards nuclear power as an important part of the solution to the problem of global warming. He regards bilateral trade treaties as corrupt, but favors multilateral treaties, albeit with strong protections for both labor and the environment.
How to Profit From A Democratic Administration
While there's no "one-size-fits-all" investing strategy for the Democratic slate, there are some key considerations to keep in mind as you craft your investment moves between now and the presidential elections next November. These are the ones that we believe are key:
- Investors who believe a Democrat will be elected should avoid the pharmaceutical, healthcare and financial-services sectors, all of which are likely to suffer with a Democrat in the White House. On the other hand, low-end retailers and manufacturers of low-end domestic automobiles and consumer goods would probably be substantial beneficiaries.
- Defense stocks would do fine under Clinton, but less well under Edwards or Obama.
- Utilities with large nuclear operations would benefit under Obama, but not under Edwards [Clinton's position is currently unclear].
- Treasury bond prices would suffer under Clinton – and probably Edwards – because of probable larger budget deficits. That would not be the case under Obama.
- An Edwards victory would probably make it worthwhile going short on a global stock index, because investors would be highly worried about the potential impact his trade policies might have on world trade and the global economy.
Overall, since Obama is cheaper than Clinton on healthcare and foreign policy, and less likely to start a major trade war than Edwards, he's the most investor-friendly Democratic candidate.
Election 2008: How the Two Parties Compare Economically
By Martin Hutchinson
Because Democrats like to tax the affluent, Democratic presidential victories are typically regarded as moderately bad news for the investor class. There are exceptions, of course, such as was the case with President Bill Clinton, where this higher-tax effect was more than counterbalanced by a huge stock-market boom.
This time around, however, apart from taxes, there appear to be two major differences between the economic policies of the two parties: The Democrats support a universal healthcare provision, and a greater degree of protectionism.
In the United States, we spend about 16% of our Gross Domestic Product (GDP) on healthcare, of which about 7% is provided by the government. In a most-ominous note, over the past 30 years, healthcare has expanded at an annual rate that's about 2.5% faster than GDP. What's more, U.S. healthcare outcomes [i.e. how long we live and how sick we are during our lifetimes] are no better than in Japan or several European countries, where healthcare spending is only 11%-12% of GDP.
That suggests that one of the principal U.S. healthcare problems is inefficiency: more-expensive doctors, more overstuffed bureaucracies [including those in insurance] and greedier hospitals. The best solution to the problem might well increase the state provision, but would certainly make substantial inroads on the cost side.
Given the current figures, it seems unimaginable that government can provide "universal" healthcare to lower-income groups for less than 10%-11% of GDP, which is about 3%-4% of GDP more than government is currently spending. That implies that the true long-term annual cost of such provision might be a net $400 to $500 billion. Thus, assurances by Democratic candidates that their healthcare plans will cost "only" $100 billion to $120 billion should be regarded with suspicion.
The second locus of concern when it comes to Democratic candidates is international trade. Historically, the Democratic party has been the one that's more favorable to free trade – a truism that reaches all the way back to the U.S. Civil War. After all, it was Republican President Herbert Hoover who signed the notorious 1930 Smoot-Hawley tariff, which many experts now believe helped kill off world trade and prolong the Great Depression.
By comparison, it was Democrat President Harry S Truman who pushed for the first General Agreement on Tariffs and Trade (the forerunner of the World Trade Organization) in 1947, and it was Democrat president Bill Clinton who signed the NAFTA deal in 1994.
However, all three major Democratic candidates are far more protectionist than Bill Clinton; indeed, even Hillary Clinton has repudiated her husband's headline achievement of NAFTA. Thus, a Democratic president might well institute a number of "anti-dumping" actions, such as the proposal by U.S. Sen. Charles Schumer (D-NY) to impose 27% tariffs on imports from China.
The trouble with such strategies is that they aren't executed in a vacuum. The target – in this case, China – naturally retaliates with tariffs or other trade barriers of their own, the controversy escalates further on both sides, and soon all the benefits of global trade to the world economy are lost to all.
While workers in uncompetitive industries might keep their jobs a few years longer, world economic growth would be much slower, and world stock prices [i.e. our investments] would be correspondingly reduced in value.
On the other hand, investors will see some likely benefits from a Democratic victory in 2008. In terms of foreign policy, two of the three top Democrat candidates are likely to get the United States out of Iraq quickly, and to spend less overall on projecting U.S. power worldwide. This may, or may not, be a good strategy against global terrorism, but it would certainly save the cost of the Iraq war, currently about $170 billion per annum – equal to about 1.2% of GDP.
Since the Democrats also plan to reverse the Bush tax cuts, even if their healthcare plans prove unexpectedly expensive, they are unlikely to run much bigger budget deficits than the Republicans.
News and Related Story Links:
- Newsday: .
FOX News Poll: Clinton Retains Double-Digit Edge Over Obama Nationally.
Hilary Rodham Clinton.
Harry S Truman.
Money Morning News Analysis:
China's Record Trade Surplus Again Inflames U.S. Criticism.
North American Free Trade Agreement.