Democrat Sweep? What We Might Expect from the Economy
Last month, I suggested we would cover the upcoming election and what we may expect to see given either a Democratic or Republican win this November.
Although the upcoming national election is less than four months away, most of us have been focused on the economic collapse/rebound and the volatility/narrowness of the U.S. equity market. Additionally, many national polls are suggesting that if the election was held today, Joe Biden would have better than a 50/50 shot of becoming president.
Our friends at Strategas suggest the probability of a Democratic sweep (Biden win, Democratic Party takes control of Senate and retains control of the House of Representatives) has doubled over the last three months. Additionally, The Economist magazine’s election model suggests the probability of a Trump win to currently be a mere 10%.
While four months is a long time before an election, the trends we are seeing suggests we need to think about a Democratic Party sweep and what that could mean for the economy and markets.
History as a Guide – Currently Leaning Towards a Biden Win
While history may not repeat, we can learn quite a bit by studying previous periods of similar events. People are currently worried about a number of issues. In 2020, we have experienced both an economic recession and a 20% downward move in stock prices (not net).
If we look back to 1952 (Eisenhower win) we see some definitive trends. Over that period of time, the economy was in recession, or the stock market declined by 20%+, in five election years. The incumbent party lost all five elections. In years when the economy was growing and the stock market didn’t enter a bear phase, the incumbent won eight of the 12 elections, for a win-ratio of 66%.
Lastly, President Trump’s approval rating was 38% positive on June 30. Since 1952, there have been five previous elections when the incumbent party president’s approval rating was lower than 40% (Truman 1952, Johnson 1968, Carter 1980, Bush 1992, Bush 2008) and the opposing party nominee won on all five occasions (Eisenhower 1952, Nixon 1968, Reagan 1980, Clinton 1992 and Obama 2008).
While not conclusive, the trends of low popularity combined with economic trouble and a weak stock market, have led to the incumbent party losing the White House.
Democrats vs. Republicans – How Has the Economy Faired?
How has the U.S. economy historically performed during both Republican and Democratic administrations? To answer this question, we turn to the St. Louis Federal Reserve’s broad database. We looked at historical performance data from 1960 – 2020. Following are our findings:
- Real gross domestic product (GDP) averaged 2.68% per year while Republicans were in the White House, including the Nixon, Ford, Reagan, G.H.W. Bush, G.W. Bush and Trump administrations.
- Real GDP averaged 3.51% per year while Democrats were in the White House, including the Kennedy, Johnson, Carter, Clinton and Obama administrations.
- Consumer Price Index (CPI) averaged 4.11% per year while Republicans were in the White House and 3.36% during Democratic administrations.
- Unemployment averaged roughly the same be it a Republican in office (6.3%) or a Democrat (6.0%).
- However, in the last four Democratic administrations, on average unemployment declined consistently from 7.3% to 4.8% upon leaving office. The Republicans? Unemployment rose on average from 4.8% to 7.8% upon leaving office.
- The only Republican administration which saw unemployment decline from the start of their terms in office was the Reagan administration.
As can be seen, from a nominal GDP standpoint, it hasn’t mattered who was in the White House over the last 60-year period, on average. However, it is interesting to note that the average GDP growth rate of the Republican administrations tend to accelerate during the last two years of the four-year term, whereas economic “momentum” tends to flatten or decelerate during most Democratic administration’s tenure.
If history is a guide, it appears that at this time Joe Biden – who currently carries a 12% positive spread to Donald Trump in national polls – may indeed be our next president. If so, what may we expect from a Biden presidency? To answer this question, I turn to Biden’s own website for answers.
What Joe is Saying
We can start this discussion by asking “What has Joe Biden been talking about?” Assuming he will do what he says he is going to do, we can expect the following:
- Taxes will rise. Corporate tax rates to rise from the current 21% level to 28%.
- Payroll taxes will rise for higher-paid employees from 0% to 12.4% on incomes above $400k (top 2% of taxpayers).
- Top individual income tax rates to increase from 37% to 39.6%.
- Capital gain tax rates rise on gains from taxpayers who earn above $1 million.
It is projected that the changes would increase taxes to Washington by $3.2 trillion over the next 10 years, or increase taxes by $320 billion per year, as compared to estimated current tax receipts of $3.86 trillion (per White House report). So, taxes would rise by about 9% as compared to current receipts. By some estimates, if enacted, this level of increase would represent the single largest tax increase in the U.S. since the Lyndon Johnson days of the 1960s.
Takeaways From The Biden Plan
- Taxes will rise. When this happens, economic growth/corporate profit growth tends to weaken.
- Federal minimum wages would more than double from $7.25 per hour to $15 per hour. This will drive one of two economic consequences…either inflation will rise or corporate profit margins will decline.
- Biden supports the “College for All” proposal from Sanders which effectively would eliminate college tuition for students from households with less than $125k in annual income.
- Biden supports the pro-Union PRO Act, which can effectively override a state’s right-to-work laws. Some suggest the PRO Act is the most aggressive pro-union law introduced since the end of World War II.
- Included in his plan is a comprehensive $700 billion blueprint to fund and support manufacturing initiatives, including alternative energy systems, telecommunications and artificial intelligence. Details of how this plan would be initiated and managed are at this time unknown.
- Biden has mentioned the government needs to “end the era of shareholder capitalism”. It is unknown what this means.
- If his highlighted tax package were enacted for the tax year 2021, the folks at Strategas suggest that the companies within the S&P 500 index after tax earnings would get hit by 11%.
- Many suppose overall costs and burdens to comply with regulatory authorities would rise, and perhaps dramatically.
If Biden becomes our next president and the Democratic party takes control of the Senate (which may occur, depending on the level of a Biden win), I believe it is safe to say we should expect a rather significant increase in government spending, with new programs in health care, infrastructure and green energy, among others.
Without placing details on these plans, the lengthy Biden-Sanders Unity Task Force recommendations suggest the overall Democratic Party agenda would supposedly focus on promoting environmental, social justice, centralization of health care and organized labor objectives. The cost of highlighted new spending programs under a Biden administration outstrips new tax revenue by a wide margin. If all is enacted (which it probably won’t be) the government deficit would continue to expand.
Perhaps these objectives are worthwhile – I guess it depends on your view. However, I suggest the pursuit of a number of these initiatives may eventually take a toll on economic liberty, efficiency and growth. But then again, I’m a free-market biased economist as I believe the productivity of government capital allocation processes tends to be less efficient as compared to the private sector handling the majority of these decisions.
As always, it depends on your point of view. History tells us that neither the Republican nor the Democratic Parties appear to have a monopoly on good governance. The U.S. economy has, in the past, been strong and diverse enough to withstand both the folly and beauty of political movements.
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