The Second Article in a Two-Part Series on the Economic Policies of the Presidential Candidates From Both Parties. Last Story: The Democrats.
By Martin Hutchinson
With the Iowa caucuses set for tonight (Thursday), it's worthwhile for investors to consider which politicians might make your life easier, and who might make a grab for your hard-fought investment gains.
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.
This is the second of two pieces in which I look at the presidential candidates' economic proposals. In the last piece, I looked at Democratic candidates Hillary Rodham Clinton, John Edwards and Barack Obama, and concluded on balance that Obama was the most investor-friendly. In this piece I 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.
The Republican Roundup
As New York mayor, Rudy Giuliani became a national hero during the 9/11 terrorist attacks. Now, as a presidential candidate, Giuliani has modest-but-sensible tax and economic policies. He worries about the abysmal U.S. savings rate, and favors tax-deferred savings accounts to increase it. He doesn't plan to introduce a "cap-and-trade" system of emissions controls to combat global warming and he wants to develop a constitutional line-item veto. He also wants to introduce competition - into healthcare insurance, by allowing consumers to buy insurance across state boundaries, and into education, through vouchers. He would keep the Bush Administration tax cuts. And, of course he has an excellent executive track record of sound fiscal management in difficult circumstances as the mayor of New York City.
The problem is foreign policy, where Giuliani has surrounded himself with Norman Podhoretz, is one of the founding fathers of the so-called "neo-con" movement. However, one worries that an aggressive neo-con Middle East policy - when combined with Giuliani's well-known mercurial temperament - could prove very expensive., now out of favor in Washington because of the difficulties following the Iraq invasion, which they sponsored. Indeed, Giuliani's leading foreign policy advisor,
Even the title of Podhoretz's latest book, World War IV - The Long Struggle Against Islamofascism, sounds thoroughly unaffordable.
Mike Huckabee, a Baptist minister and former governor of Arkansas, frequently invokes God in his campaigning. The trouble is, God will also have to intercede once Huckabee is elected, for divine intervention is the only way this candidate's economic policies will work. His "fair tax" plan - the principal proposal distinguishing his ideas from those of former President Jimmy Carter - is a consumption tax at a very high rate, and would supposedly replace the existing personal income tax. This would tax the poor more than the rich [because the poor save less] and would also sharply increase the cost of housing and medical services - already two of today's biggest economic problems.
Worst of all, this new tax plan would spur widespread evasion. Huckabee's federal ban on smoking wouldn't end smoking, any more than the Volstead Act [more popularly known as Prohibition] ended drinking; it would merely eradicate $30 billion in tax revenue from federal and state governments - much of which is being used to finance healthcare programs. His plan for complete self-sufficiency in energy within eight years - the United States is currently only 69% self-sufficient - would probably require him to remove the sparkplugs from all of America's automobiles.
Economically, Huckabee is just not ready for the prime time.
John McCain is the "root canal" candidate - his economic slogan might as well be: "Vote McCain - Enjoy the Pain!" He would keep most - but not all - of the Bush tax cuts, would attack pork barrel spending aggressively, would abolish ethanol subsidies, and would sharply reduce agriculture subsidies [and, yet, he actually does have some supporters in Iowa!]. McCain is a strong supporter of free trade, even when U.S. jobs are lost, and favors an aggressive approach to eliminating the future deficits posed by Social Security and Medicare. He would also introduce a "cap-and-trade" system of carbon-emissions permits, giving the government an additional source of revenue.
So, if getting rid of the federal budget deficit and reducing the burden of debt on our grandchildren is your No. 1 priority, McCain is your man.
Ron Paul has no executive experience, having held office only as a congressman [though senators McCain and Thompson also have no executive experience, either]. Paul is the only candidate taking a truly logical approach to small government, believing it should be small internationally as well as domestically - after all, the Iraq War's annual expenses, alone, exceed 1% of U.S. gross domestic product (GDP). In general, Paul best represents truly traditional Republicanism, that of the small government President Calvin Coolidge [though, unlike Coolidge, Paul favors free trade].
Paul would eliminate such corporate welfare programs as subsidies for agriculture and ethanol, would provide education vouchers and offer tax credits for home schooling, would introduce Health Savings Accounts, and would eliminate restrictions on insurance coverage to make healthcare more efficient. He would also abolish several government departments and all agencies that engage in the "takings" of private property.
Paul is also the only candidate to criticize the U.S. Federal Reserve, since he believes that a Gold Standard is the ideal monetary system, but that a Paul Volcker-style Fed, which keeps monetary policy tight, is the next best thing. In Paul's view the dot-com and housing bubbles were huge and preventable wastes of resources. Internationally, he would pull the United States out of Iraq, but would also pull out of most international agencies and other entanglements. While Democrats are multilateralist in foreign policy, Paul is largely isolationist.
In spite of his vociferous student support and impressive Internet fundraising, Paul won't win. But his ideas may provide a roadmap for a more-successful campaign in the future.
Mitt Romney's economic policies are mostly a conservative "wish list." However, when really scrutinized, it's easy to see that they're unlikely to pass muster with Congress. Romney wants to eliminate capital gains taxes on incomes under $200,000. And not only does he want a line-item veto to restrain Congressional spending, Romney also wants the right to reduce any Congressional appropriation by up to 25% [this is probably unconstitutional] and to require a 60% vote in Congress to increase taxes. He would also hold appropriations growth to 1% below inflation by using the veto [a very tight limit when compared with the 3% to 4% real growth under current U.S. President George W. Bush]. Romney would increase military spending by 10%, putting another 100,000 troops in uniform.
All wonderful stuff. However, once he discovered that these policies stood no chance whatsoever of passing even a Congress with a large Republican majority [because several of these proposals are direct assaults on the legislative branch's power - regardless of which party controls Congress], Romney would have two choices: Keep banging his head against a wall, or fall back on the philosophy he employed as the governor of Massachusetts, and that his father employed as the governor of Michigan - transforming himself into a conventional, big-spending liberal Republican of the 1960s.
Frankly, I'd rather know what I'm getting when I elect someone to the White House.
Former Congressman and Law and Order star Fred Thompson has an interesting tax plan, under which we would get to choose whether we pay the current income tax, or a simplified flat tax with rates of 10% up to $100,000, and 25% above that figure. That sounds fine, until you work out the cost of allowing taxpayers to choose which tax they wish to pay. If we extrapolate from the estimated $80 billion annual cost of removing the Alternative Minimum Tax, or AMT [in which the government gets the option of determining which tax you pay], it seems likely that Thompson's tax proposal would reduce revenue by around $200 billion per annum. Since there are no significant savings elsewhere in his economic platform, that would throw the federal budget seriously out of whack. Fred: We give you a B+ for innovation and effort, but a D- for basic arithmetic!
How to Profit from a Republican Regime
- Defense stocks would probably perform superbly under a Giuliani administration and fairly well under other Republicans - except Ron Paul, who would make them tumble.
- Investors who believe a Republican will be elected should look at the pharmaceutical, healthcare and financial-services sectors, all of which would be damaged by a Democratic victory. Investors believing a Republican will take the White House should also look at domestic oil companies and oil-service companies, since the Republicans seek to encourage domestic oil exploration.
- Utilities with large nuclear operations would benefit under McCain.
- Treasury bond prices would probably drop under Huckabee or Thompson, chiefly because of the uncertainty of their arithmetic. Giuliani and Romney might also run into deficit problems. McCain, balancing the budget, and Paul, reducing both inflation and the size of government, would both be good for Treasuries.
- Paul's high interest rates and budget cutting would punish stocks in the short run, but benefit them in the long term.
- Tobacco companies and purveyors of junk food would suffer under Huckabee, while you wouldn't legally able to invest in the "tobacco bootleggers" who would make huge fortunes.
Ron Paul has the most investor-friendly economic policies in the long run. If you think he can't win and want a "serious" candidate, the best bets among the Republicans are McCain [but brace yourself for fiscal pain] or Giuliani [and cross your fingers].
Editor's Note: Money Morning Contributing EditorMartin Hutchinson has been chronicling the economic platforms of the presidential candidates, and has had personal interviews with economic advisors for candidates McCain, Obama and Edwards. His analysis of the Democratic candidates appeared just before the holidays.
Election 2008: How Each Party Will Impact the U.S. Economy and the Domestic Stock Market
By Martin Hutchinson
Democratic presidential victories can generally be regarded as moderately bad news for U.S. investors, especially because of their generally higher tax levels on the higher-income classes. There are some notable exceptions, of course, including President Bill Clinton, where a huge bull market in stocks more than counterbalanced the draining impact of higher taxes.
This time around, apart from taxes, there appear to be two major differences between the Democrats and Republicans:
- The Democrats support a universal healthcare provision.
- And the Democrats favor a greater degree of protectionism.
The United States spends about 16% of its gross domestic product (GDP) on healthcare, of which about 7% is funded by the government. Ominously, healthcare expenditures have increased over the past 30 years at a rate that's consistently 2.5% faster than the growth rate of GDP. What's more, U.S. healthcare outcomes [how long we live and how sick we are while we're alive] are no better than in Japan, or than they are in several European countries where healthcare spending is only 11% to 12% of GDP. That suggests that one of the principal U.S. healthcare problems is inefficiency: We have more expensive doctors, more bloated bureaucracies [particularly those in the insurance arena] and greedier hospitals. The best solution to the problem might well increase the state provision, but also would certainly make substantial inroads on the cost side.
Given the current figures, it seems inconceivable that government could provide a "universal" healthcare provision to lower-income groups for less than 10% to 11% of GDP - or about 3% to 4% of GDP more than government is currently spending. That implies that the true long-term annual cost of such a provision might well be a net $400 billion to $500 billion. Thus, the assurances by Democratic candidates that their healthcare plans would cost "only" $100 billion to $120 billion are to be regarded with suspicion.
The second area where Democratic policies should spawn investor concern is international trade. Historically, the Democrats have been the party more committed to free trade, right back to the Civil War. After all, it was Republican president Herbert Hoover who signed the notorious 1930 Smoot-Hawley Tariff Act, which is now believed to have killed off world trade and prolonged the Great Depression, while it was Democratic 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 Clinton, another Democrat, who signed the North American Free Trade Agreement in 1994.
However, all three major Democrat candidates are far more protectionist than Clinton; indeed even Hillary Clinton has repudiated Bill's signal achievement of NAFTA. Thus, a Democrat president might well institute a number of "anti-dumping" actions, such as Senator Charles Schumer's (D-NY) 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, there are some likely benefits to investors from a Democrat victory in 2008. On 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 might, or might not be, a good strategy against global terrorism, but it would certainly save the cost of the Iraq war - which equates to about $170 billion per annum, or 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:
- Money Morning Presidential Campaign Analysis:
Election 2008: Which Democratic Candidates Will Be Best For Investor Profits.
FOX News Poll: Clinton Retains Double-Digit Edge Over Obama Nationally.
Hilary Rodham Clinton.
Emissions Controls (Cap and Trade).
William J. (Bill) Clinton.
- Money Morning News Analysis:
China's Record Trade Surplus Again Inflames U.S. Criticism.
- Christian Science Monitor:
North American Free Trade Agreement.
President Jimmy Carter.