Post-Election Day thoughts: “Is Trump’s new coalition enduring? + An early peak into his supply side elixir”
By David Schane, USA – 10 Nov 2016.
Congratulations on your accurate election analysis! I always told my colleagues and friends to not be complacent about a Clinton victory – although for academic honesty I must acknowledge that my family supported Hillary in the end (despite her flaws, such that I had not personally voted for her previously in either the presidential primary elections of either 2008 or 2016).
What we know now as of 9:30 AM Eastern (the USA market open on the morning after Election Day) is the following:
Regarding election statistics and the closeness of the election, Hillary appears on track to end up with between a 1.00% and 1.50% margin of VICTORY in the national popular vote (as opposed to the electoral college) Note, that kind of popular vote victory would be well larger than Al Gore’s 0.5% margin of victory in the popular vote in the historic contested election of 2000 (which was the only time since the late 19th century, until yesterday, when a US presidential candidate won the popular vote and lost the electoral vote).
The popular vote margin I project is quickly computed by multiplying 50% onto both Clinton’s and Trump’s respective vote totals so far in the State of California (as only 67% of the CA vote has been counted currently). As more than 1 in 9 Americans lives in CA, the uncounted CA vote will add substantially to Clinton’s +162,000 vote national advantage in the raw popular vote that’s been announced to this moment. For logical reasons (due to the fact that polls closed later on the West Coast, the number of uncounted absentee ballots – compounded by the fact that California is the most heavily populated state by far), the uncounted CA vote will substantially increase Hillary’s margin of victory in the popular vote that we see already.
For those of you that are wondering, the vote counts in Texas and Florida (which are the 2nd and 3rd largest states respectively and states which Trump both won) are already both 99% and 98% counted – such that changes to the national raw vote total will hardly by affected by the small number of outstanding votes in either Texas or Florida.
While Hillary Clinton under-performed Barack Obama’s 2012 vote totals in a number of important states (particularly in the “old” and more demographically aging, industrial Midwest – such that Obama won and Hillary lost in the electoral college), it’s important to note that Hillary outperformed Barack Obama’s 2012 election victory results in demographically “new” and younger population states along the Mexican border. Indeed, if one looks at the four states which form the US border with Mexico from west to east (namely California, Arizona, New Mexico and Texas), note the following current percentages of vote totals:
Specifically in 2012, President Obama won California by a margin of 59% to 38% and Obama won New Mexico by a margin of 53% to 43%. Contrasting those statistics with yesterday’s vote totals available as of now, we see that Clinton has a substantially wider margin of 61% to 33% victory over Trump in the State of California. Moving on to New Mexico, Clinton has a margin of victory of 48.3% to 40.0% over Trump. While that is slightly narrower than Obama’s 10% margin of victory in New Mexico in 2012, we should recognize that the 2016 Libertarian candidate Gary Johnson served as Governor of New Mexico for eight years between 1995-2003. Stemming from familiarity (and Johnson’s status as a “Favorite Son” candidate locally), Johnson received an outsized 9.3% of the New Mexico vote (which is roughly triple his 3.2% current national percentage of the vote). Continuing on to Arizona, Obama lost the state in 2012 to Romney by ten points (44% to 54%) while Clinton lost the state by four points (45.5% to 49.5%). In Texas, Obama lost the state to Romney by 16 points (41% to 57%), while Clinton lost the state by only 9 points (43.5% to 52.5%). So with the exception of Clinton’s slightly lower margin of victory in New Mexico (which can readily be explained by Gary Johnson’s outsized vote totals as “Favorite Son”), Clinton out-performed Obama substantially in each of the four US states along the US border yesterday.
While the above named states along the Mexican border naturally have some of the very largest percentages of Hispanic voters, the Hispanic surge in US population is NOT confined to these four Border States. Indeed, large diverse Northern states (like Illinois and New York) have substantial Hispanic populations themselves. As examples and according to the 2010 census, Illinois had a Hispanic population of 15.8% while New York had a Hispanic population of 17.6% (and it’s important to observe those are two states that Clinton both handily won last night). Her success in IL and NY can notably be contrasted with “old”, aging industrial and less diverse states like Ohio, Pennsylvania and Wisconsin (all three of which Clinton lost last night). Specifically note too that these three latter states (OH, PA and WI) have much lower Hispanic populations (according to the 2010 census) of 3.1%, 5.7% and 5.9%, respectively.
So with all those election stats as backdrop, I believe one of the most vital questions political scientists and various analysts should ask on the morning after Trump’s stunning election victory, is whether Trump’s successful electoral college coalition is likely to be an enduring or passing phenomenon. While we don’t have complete exit poll data yet from yesterday’s election (regarding gender, race, income, educational achievement credentials and more), one thing we should note first is that the percentage of white voters (and white males) continues to decline substantially in each and every election (and I believe may have slipped to the low 70% range nationally from what I remember seeing previously).
So while Trump’s stunning 2016 election victory might be called the “revenge of the white blue collar male”, Hillary Clinton still will end up winning the raw popular vote by over 1% (and perhaps even 1.5% as mentioned above) in the end. As such, I think it’s fair to say that the “rainbow” coalition Hillary assembled in an electoral college loss (by a candidate perceived as a flawed, status quo, “privileged” insider) still reflects the wider demographic trends in the nation – as she appears to have clearly won the popular vote. As such, Trump’s victory coalition yesterday would appear to be threatened by the demographic trends of the nation which will continue to evolve between now and the next presidential election in 2020.
So, how will Trump enhance and secure his electoral coalition over these next four years? Of course, Trump could “deliver” – and renew his mandate in 2020, despite the demographic trends cited (which I would suggest are an inherent systemic source of vulnerability). Since elections are almost always won on economic policies and performance (and since Trump’s disaffected legions are most earnestly expecting him to reverse their economic distress), what will Trump be able to deliver?
We know from his victory speech late last night that President elect Trump has ambitious spending plans (particularly on infrastructure) that would appear to be larger than almost every other leading politician from both major parties (except for the most left-leaning Democrats). We also know that it was the right wing of the GOP (particularly the “Freedom Caucus” in the GOP led House of Representatives) that heretofore insisted on equal and commensurate cuts in government spending elsewhere (when any politician dared propose new “stimulus” programs). Recall too that Obama’s 2009 “stimulus” package (which devoted a significant percentage of its overall spending dollars to public works and infrastructure projects) was greatly critiqued by Republicans – such that the very word “stimulus” became maligned in Washington and the body politic.
While we don’t know a lot about Trump’s taxation policies, he seems to believe in substantial tax cuts (and has pledged to generally not reduce middle class “entitlement” spending either). So Trump’s own variation of “stimulus” spending, i.e. on massive new infrastructure projects (which is one of the only specific policy measures he announced within his victory speech last night) along with reduced taxation and limited entitlement cuts seem to imply a new and bold round of significant deficit spending. Note too that the Freedom Caucus wing of the GOP (which has generally been the part of the GOP advocating for the strictest budget discipline) also happen to be the most vociferous Trump supporters (such that I believe they are unlikely to challenge their champion, President Trump, on spending).
While I don’t want to make too much of knee-jerk market reaction this morning, I would suggest the storyline and theme I’m underlining here, namely of greater deficit spending, seems to be borne out by looking at today’s startling changes in the US yield curve. Indeed, 2 year Treasuries are actually down in yield by 2 bp right now, while 10 and 30 year Treasuries are up in yield by 10 and 14 bp, respectively as I write, from yesterday’s closing levels.
Moving beyond President elect Trump’s statements from his victory speech last night and returning to his prior statements from the campaign trail, Trump appears to believe that we can boost our GDP growth from the very modest 2% level or less the US has been tracking at since the 2009 great recession up to 4% or 5% (or even higher growth rates) – with a combination of massive spending (like on infrastructure) and tax cuts. This seems to me to be a leveraged Reaganesque type bet on supply side economics bringing higher rates of economic growth to a degree that we haven’t seen before – at least in modern times since right after the post World War II baby boom (including precedents some analysts might cite going back to the early 1960’s under President John F. Kennedy).
Mind you, if Trump’s economic policies are successful, he certainly would not need to worry much about the demographic “rainbow” coalition trends I cited above, as President Trump would sincerely win over American’s pocketbooks, hearts and admiration. The question though is whether Trump’s economic policy prescriptions (of which we really know rather little in detail) are actually possible or pie-in-the-sky type hope?
While I defer to my colleague Christian Takushi, who has on these pages expounded on the challenges of achieving high economic growth rates in aging democratic societies, I agree with Christian and submit that demographics are not going to rev up economic growth in the USA. Moreover, one of the main reasons the US has higher economic flexibility than many of its G-7 peers (beyond mobility and less work force regulation/social safety net costs) – and commensurately higher rates of growth – is that we have better demographics compared to Europe and Japan. Some of that is undoubtedly due to more liberal immigration policies here in the USA (which includes the heretofore growth of the young Hispanic population cited above), which Trump would appear to want to shut down. As such, I would submit that Trump’s immigration policies will be a hindrance to his objective to increase US GDP growth by a factor of 2x or more.
So apart from demographic growth trends, what are some of the other large picture phenomenon that President Trump could tap into to produce US GDP growth rates of 2x or even 3x beyond what we’ve seen over these last several years?
Looking to reduced regulations unleashing unbridled degrees of productivity (that’s been previously bottled up), that might be helpful around the edges – but I don’t believe to the degree necessary to produce the growth rates Trump appears to be targeting. Importantly too, there are significant sectors, including financial services perhaps most notably, where Trump campaigned on increased regulation (not less) – as Trump stated a desire to reintroduce the Glass-Steagall Act.
Moving on to other individual sectors, Trump’s policies would also seem to NOT favor targeted industrial measures benefitting smart technologies in the renewable energy sector (which has been a source of enormous wealth creation globally). Irrespective of Trump’s doubts on climate change, smart new technologies in clean energy are producing major new industries and jobs (even here in the rustbelt state of Ohio) where heretofore declining sectors (like tire and rubber) were transitioning to smart chemical applications in various post-industrial polymers, producing wealth and new jobs where there was decay.
Expanding onto what we believe would appear to be Trump’s trade policies, literally pledging to pull the US out of NAFTA (along with more muscular and nationalistic trade actions) would seem to potentially imperil US growth rates. At a minimum, they would certainly create increased friction with allies Canada and Mexico – which together form an enormous percentage of US exports today. Furthermore, these policies would create major tension in all the multilateral trade regimes that the US itself founded or was a great advocate for (like the WTO itself) – which would likely bring more divisiveness into other spheres of US economic and foreign policy, perhaps bringing heightened currency tensions to the fore as well. (Speaking of trade, I believe it’s also important to note that many mainstream GOP leaders, like Senator Rob Portman are the biggest supporters of multi-lateral trade regimes – and that Portman was US Trade Rep to these very bodies himself). In sum, I would submit that fomenting trade friction (even if it’s more polemics and posturing than substance and is accordingly contained) is NOT a recipe for doubling US economic growth rates.
Moving into the defense spending sphere, while President Trump on some preliminary levels might appear to want to reduce US defense spending – or at least reduce US foreign entanglements and focus on domestic matters closer to home (in a way that only the most ardent, left-wing Democrats might hope for but could never enact in legislation), there are too many influential hawks in the Senate GOP (John McCain and Lindsey Graham for starters) much less a bi-partisan consensus to defend US interests and allies abroad (that even General and President Eisenhower in a way unsuccessfully challenged when he spoke warningly about the “military-industrial complex” in his presidential farewell address of January 1961). So during a time when Trump spoke of US “missile gaps”, it’s hard to see reduced US defense spending (which generally has a lower positive “multiplier” effect than other kinds of government spending) opening up the budgetary path to more “productive” forms of US government spending (and commensurately higher growth rates) either.
Finally, while global central banks have managed to repress the yield curve through their various unconventional and “QE” monetary policies since the financial crisis of 2008-2009, higher deficit spending and threats to the long end of the Treasury curve (as we see in the Treasury selloff today), would also appear to imperil the kinds of US economic growth rates that President Trump has so far rhetorically aspired to. That’s because rising yields (and commensurately higher debt servicing costs) would be a major headwind to any economic recovery Trump might through his policies try to engender. That’s unless one really drinks the supply side “Kool-Aid” – and believes that higher deficit spending and reduced taxation creates massive growth that’s the elixir that solves everything (including the difficult math of higher spending and lower taxes actually combining to more than double US GDP growth rates AND reduce the US deficit, simultaneously, which again appears to be Trump’s stated belief).
In closing, if the GOP led Congress concedes on all budget discipline and throws fiscal conservatism out the wind, which I believe is likely (and fully exorcises former President George HW Bush’s non-belief in “voodoo economics” – and even forgets Ronald Reagan’s many tax hikes, when Reagan himself faced up to the limitations of supply-side measures only) – and starts massive spending on a scale perhaps even larger than Bernie Sanders would have proposed (but never could have enacted) and cuts taxes too, yes, we might be able to get a substantial deficit financed spending boomlet for 1 or 2 years. It’s hard for me to see how these higher growth rates could be enduring though with higher Treasury yields and higher inflation risks (due to reduced capacity) – even if one dismisses any potential growth drags from less flexible immigration and trade policies (as those drags would kick in over longer time periods) and dismisses potentially increased friction with our allies too.
David Schane, Oberlin, Ohio, 10 November 2016
From the editor: We thank Mr. David Schane for sharing with us his thoughts on the FED policies. Having traveled the world and lived in Europe as well, we believe Mr. Schane’s thoughts are vey valuable. They convey both a holistic view and a differentiated perspective. The opinions expressed here are his own and Mr. Takushi and the other contributors do not necessarily agree with the views of Mr.Schane. All contributors to our website express their own independent opinion based on their research. Thus, their articles are not edited by us, Geopolitical Economics.
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