In recent months, I have mostly written about short-to-medium term outlooks. Part of that is because making medium-to-long-term predictions is hard. But I just saw three tweets on the political economy of 2018, each making a case for how to view the likely political backdrop for 2020’s presidential election in the US. So, I want to bring those three together into a coherent, overarching view and discuss what that could mean for the US two years from now.
What’s the Fed going to do?
Now, these tweets were mostly about the politics. But I want to start with the economy.
For example, if you asked the average economic prognosticator at any time over the past decade how much longer she thought the expansion would last, how long do you think she would give? 3 years? 5 years? We know that it’s been ten years of expansion. But, all along the way, most people were on tenterhooks, doubting how much longer this thing could last, myself included.
Given how long things have stayed up, why shouldn’t we be more optimistic then? What’s different about right now? For me, it’s the Fed’s interest rate hikes. As you know, I call this “the most dangerous period in the business cycle“. And here’s how I put it a year ago:
If the economy is running solidly and leading economic indicators are bullish, the Fed is hard-pressed to not raise rates in an environment in which headline unemployment is low and falling, asset prices are rich, and lending standards have loosened — even if the yield curve is flattening. Aren’t they supposed to take the punch bowl away?
I think that’s where the Fed still is now. And if you listened to the Fed before the October market meltdown, you would have heard officials saying things indicating risks that were evenly balanced. But, if they had to choose a side, Fed officials spoke as if they would have feared overheating more than a crumbling US economy. And so the risk has been an accelerated rate hike timetable.
I think that risk has diminished, and not because of the market panic. If you look at the Fed’s summary of economic projections, it’s a finely balanced assessment. Some of the numbers moving show greater weakness, while others show more strength. I have outlined them in yellow.
Source: Federal Reserve Board
So, as we head into 2019, the Fed may well stick to its three rate hike timetable for 2019, judging that the uptick in GDP growth will soon pass.
What’s the likely economic backdrop?
So, I think it’s not just inappropriate for President Trump to malign the Fed so openly. It’s also premature. It’s not at all clear yet whether they have overtightened or will do so. We will just have to wait and see.
Nevertheless, the risk is there. And so, at a minimum, we have to view the economic backdrop for 2018 as likely more favorable than the one that will be in play in 2020. What’s more is that the tax cut stimulus will have worked its way off by 2020. And that means growth will likely be waning. With the House of Representatives falling to the Democrats, I also see more stimulus in the next two years as very unlikely.
So that’s my assumption here, that growth will slow, and continue to slow enough by 2020 that it will be lower than it is right now. The real question is how much more favorable will 2018 look when 2020 rolls in. We could be in a credit crunch or even in a recession. This coming year will be key in determining that outcome.
All of the rate hikes to date will come to bear on the credit side next year. And there will be more hikes to come. Never has the Fed been able to raise rates this late into an economic cycle and engineer a soft landing. We had the mid-cycle pause in the 1990s. But that was very early cycle. We are much later here. So the risks are higher that something goes pear-shaped.
What about the politics then?
Here’s where the three tweets come into play. Let me lay them out for you:
Think of it this way: There’s not a single demographic trend in America that benefits Republicans. https://t.co/j9x9lGdW3I
— Jonathan Swan (@jonathanvswan) November 13, 2018
“Democrats will win the [House] popular vote by a larger margin than the GOP achieved in either the 1994 or 2010 waves.”
So much for those early election-night takes about the “blue trickle.” https://t.co/MQ5gp9u25Q
— Ezra Klein (@ezraklein) November 13, 2018
Analysis: In at least three states, Republicans lost the popular vote but won the House https://t.co/vFgXvsjiJj
— The Washington Post (@washingtonpost) November 13, 2018
The broad narrative they make is the following:
- Trump’s electoral strategy in 2016 and again in 2018 was nativist. And that appeals to white, middle-aged men more than any other demographic in the United States.
- Demographics have been working and continue to work against a Republican Party if it is overly dependent on white, middle-aged men to win elections. This is true even in the South due to a rising Hispanic population.
- Some of the numbers from 2018 bear this out.
- But Trump’s messaging did well enough in 2018 to help the GOP hold the Senate, even gain a seat or two.
- And gerrymandering has helped, particularly at the state level.
- But Trump as Republican standard bearer lost the House of Representatives because the tide is turning against them.
The conclusion: Things look good for the Democrats in 2020.
This seems like a reasonable line of argument. I do want to question the conclusion though, because I don’t like pat answers.
Politics aren’t just about demographics. They are also about messaging. And the Democrats are very divided about what their message should be. This is one reason Trump became President and the reason he could be re-elected.
Part of the problem for Democrats is that their leadership is old. All of the names you hear in leadership positions are of people who have been around since the Clinton years. For example, I remember meeting Senate Minority Leader Chuck Schumer at the Tennis US Open in 1998, where he was campaigning to take the seat of Al D’Amato, a Republican, back when Republicans were winning statewide office in New York. That’s a long time ago. He’s now 68.
Then, you’ve got Nancy Pelosi, who is 78, in line for the House Speaker role. In terms of Democratic house chairs, the only name you hear these days is Maxine Waters for the Financial Services Committee. She’s 80. And the frontrunners for President are Joe Biden, who will be 76 soon and Bernie Sanders who is 77. I’m also hearing that Hillary Clinton might run again. In 2020, she will be 74.
Ostensibly, one reason the Democrats fell out of power is they didn’t have ideas and messaging that resonated with a lot of voters, crucially white working class voters in the Midwest. How do the Democrats expect to win when their whole front bench is 70 or older? Where are the new ideas going to come from? Schumer is the youngest of that bunch and he’s been in office for 20 years.
I’ve been talking to people like Marshall Auerback about people like Sherrod Brown and Nancy Klobuchar as Democrats with fresher faces with new ideas. He agrees and says they could get Midwestern voters. I even saw my friend, Alan Tonelson, who supports Trump on protectionism and cares deeply about working class jobs, tweeting about Brown in a positive way. Brown says he is thinking about running for President. But how likely is he to get the nomination if Clinton or Biden throw their hats into the ring?
So, my view here is this: the economy will likely work in the Democrats’ favor in 2020. And demographics are indeed working against the Trump strategy, that relies excessively on males and Southerners. But, the Democrats don’t have a message that resonates with lots of people in working America. They are still beholden to coastal elite special interests on Wall Street and in Silicon Valley. So, it’s not clear to me what will happen in 2020.
And since I’m an econ guy, I think the political issues to watch are economic: healthcare, jobs, wages, trade and the economy. Depending on how these issues develop, how Trump does as President, how the Democrats do in the House and who the Democrats field as candidates, we could have very competitive races in 2020.