Tags: Election 2008, Martin Hutchinson

Election 2008: As Democratic Primary Hits a New Pinnacle Today, Obamanomics Emerges as Clear Front-Runner for Investors

By , Money Morning •

"Election 2008" is an ongoing Money Morning series that looks for profit plays emanating from the presidential election campaign.

By Martin Hutchinson
Contributing Editor

With contests in both Indiana and North Carolina, today (Tuesday) probably marks the last of the crucial Democratic presidential primary election contests between senators Hillary Rodham Clinton and Barack Obama.

Unless the cynical premise of Rush Limbaugh's "Operation Chaos" is realized, and the Democrat presidential wingding continues to move forward at an increasingly vitriolic level through that party's national convention in Denver in late August, whomever wins the Democratic nomination is pretty likely to be our next President. So, as investors - whether Democrat or Republican - which of the two candidates should we be rooting for?

The Case for Clinton

Our initial reaction would probably be that this question looks like a no-brainer. The Standard & Poor's 500 Index rose from 427 to 1,342 during the eight-year administration of Hillary Clinton's husband, giving investors an average annual total return of 17.4% - the highest of any presidency since World War II.

That huge market run-up - and the hefty yearly returns - were pretty much justified. President Bill Clinton was committed to a balanced federal budget, raised taxes only once, and that in a moderate fashion, reformed welfare and signed the North American Free Trade Agreement (NAFTA).

All of those policies were immensely beneficial to the U.S. economy - and to investors - as, in the short term, were the monetary expansion policies of the Alan Greenspan-led U.S. Federal Reserve (although we may well be paying the long-term price for that now). If we could be sure that Clinton would follow her husband's policies, and that the economy was in a state fairly similar to that of 1993, we could as investors be confident that a Hillary Clinton presidency would contribute significantly to our collective net worth and, on balance, would serve the entire country equally as well.

Unfortunately, there are two problems with such optimism. First, Hillary Clinton's policies differ significantly from her husband's. Second, the U.S. economy today is in a very different position than it was in 1993, so different policies and capabilities are required.

There are two obvious policy areas where Hillary Clinton differs from her husband: trade and taxes. Sen. Clinton now claims she would have opposed NAFTA; certainly, she pretty much opposes any other trade agreement that's up for discussion. For investors, international free trade is extremely good for business and, hence, for profits. The costs of very free trade are largely borne by the less-skilled workers of rich countries; its benefits flow largely to corporations. That's why free trade is a tough political sell, even though its overall benefits greatly exceed its costs. As investors, however, we should be wildly in favor of it.

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When it comes to taxation, Sen. Clinton wants to reverse the George Bush tax cuts, and favors increases in the Social Security tax for those at the top of the income scale. She also favors a higher capital gains tax - all measures that tend to reduce both economic growth and investor returns. She also favors windfall taxes on oil companies, and has a healthcare plan that would be very expensive and that must be paid for somehow.

Perhaps the biggest difference between the two Clinton's is Hillary Clinton's economic populism. When Bill Clinton ran for president in 1992, he campaigned on the catchy platform, "It's the economy, stupid." But he was notably free of the economic redistributionist and corporation bashing that had weakened the credibility of such presidential campaigns as Walter Mondale's in 1984 and Mike Dukakis's in 1988. When Bill Clinton was president, his treasury secretaries - Lloyd Bentsen, Robert Rubin and Lawrence Summers were notably centrist and business-friendly. Economic populism only returned to the Democratic mainstream with the Al Gore campaign of 2000, and that may well be why he narrowly and unexpectedly lost to current President George W. Bush.

Sen. Clinton, on the other hand, already has proposed an economically nonsensical but populist idea - a gasoline-tax "holiday" for the peak summer driving season between Memorial Day and Labor Day, to be paid for from the profits of big oil companies. Such a tax change would tend to increase oil consumption, driving up prices, worsening any global warming and benefiting largely the mega-wealthy oil states of the Middle East and Venezuela.

The Sen. John McCain version of this proposal, without the attack on the oil companies, would be a subsidy from U.S. taxpayers to the oil sheiks; the Clinton version is a subsidy from the U.S. oil majors to the oil sheiks. Neither version makes much economic sense.

Obamanomics

Obama shares the Hillary Clinton flaw (from an investor viewpoint) of wanting to increase taxes - including capital gains taxes - at the top end of the scale. However, his healthcare plan would be somewhat cheaper (because it would mandate coverage only for children, not for everybody). And he's more dovish on the Middle East, which may or may not be good policy, but is certainly likely to save money. On trade, Obama has echoed Clinton in protectionist Pennsylvania, but is believed to be generally more trade-friendly. He has notably failed to endorse the gasoline tax cut, describing it as a "classic Washington gimmick."

When it comes to policy, then, Obama beats Clinton in investor-friendliness, albeit not by very much.

However, the really difficult question to consider is the current state of the U.S. economy.

In 1993, the U.S. economy was emerging from a recession, with only the federal budget deficit as a major worry. On the positive side of the ledger, there were signs that the economic reforms of the 1980s had made the United States more competitive with the rest of the world. In that situation, government mostly needed to get out of the way and allow the boom to billow, and that's essentially what President Bill Clinton did.

The 2008 version of the U.S. economy is much less clear. Indeed, the outlook is downright cloudy. Commodity and energy prices are at record levels and are likely to produce substantial consumer price inflation in the months ahead. Interest rates already are at exceptionally low levels - more than two percentage points below the rate of inflation - in order to cope with the U.S. economy's continued financial crisis.

Housing is in a deep recession, with prices dropping more rapidly than at any time since the early 1930s. The dollar is weaker against other currencies than it has ever been, yet the United States still has a huge balance of payments deficit, suggesting it is less competitive than it should be. Stock prices, which in 1993 were at moderate levels, are today within 10% of their record highs, yet corporate earnings are declining, led largely by the disappearance of earnings from the financial sector.

Thus the economic situation today is far more difficult than it was back in 1993, and much more likely to produce "calls for government action" of one kind or another. Economic inaction, which worked so well for Bill Clinton, will not be a politically viable option today. What kind of action the government takes in response to those calls for action will have a huge effect on investor returns for the presidential term we are about to enter. For instance:

  • Populist, economically nonsensical policies that include protectionism, heavy income redistribution and increased government spending will make that period a very difficult one indeed.
  • Intelligent, carefully crafted policies that protect free trade, that avoid income redistribution and that provide only targeted increases in public spending may improve the situation somewhat. They will at least have the virtue of not making it worse, and of quieting the calls for more extreme policies that would be hugely damaging.

Given that choice, in today's situation, my rooting preference would be for Sen. Obama.

[Editor's Note: Money Morning Contributing Editor Martin Hutchinson has personally interviewed the economic advisors for candidates McCain, Obama and Edwards, and concluded that Obama and McCain would be the best candidates for investors. He wrote about the "Potomac Primaries" in mid-February. For a full report on the "presidential profit plays," please click here. The report is free of charge].

News and Related Story Notes:

  • Money Morning Election 2008 Investment Series:
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    Election 2008: U.S. Economy Cries "No mas" to the Democrats    .
  • Web Site:
    Democratic National Convention.