A 2020 Recession May Be The Only Roadblock To Trump’s Reelection

Tuesday, September 3, 2019
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Even though the 2020 election is more than a year away, President Trump’s reelection appears likely unless the economy turns down sharply next year. One reason why Trump is likely to win is that sitting presidents are almost always reelected if the economy is performing well. Like him or not, the current US economy is one of the best in a long time, and this strongly suggests a Trump reelection.

The unemployment rate is 3.7 percent, the lowest in about 50 years. Wages are growing at their fastest rate in more than a decade, real GPD growth has averaged about three percent per year since the 2016 election, and inflation remains low.

Yale University economist Ray Fair has been predicting presidential election outcomes based on economic performance for decades. His statistical model, which has been very successful in tracking election results, predicts that the Democratic presidential candidate will receive only about 46 percent of the two-party vote given current economic performance. And Fair’s model predicted a Trump election in 2016.

Fair’s model has a very successful long-term track record. Consider the 1996 election. Bill Clinton was mired in various scandals ranging from the Whitewater investigation to his relationship with Monica Lewinsky. Yet the economy was growing quickly at that time, and inflation was low. Clinton won easily, with 54.7 percent of the two-party vote. Fair’s model predicted a 52.7 percent Clinton vitory. Despite Clinton’s various significant personal problems, the strong economy was the reason he was reelected and why Republican candidate Bob Dole never really had a chance.

Alternatively, consider the 1980 election between President Jimmy Carter and Ronald Reagan. The economy was performing very poorly at that time, having suffered a recent recession as well as 13 percent inflation and 18 percent interest rates. Carter received only 44.7 percent of the two-party vote. Fair’s model predicted 45.6 percent for Carter. With such a weak economy, Carter never had much of a chance of being reelected.

It is not surprising that the economy plays such a large role in determining how people vote, and, during an election season when cultural and social issues are front and center for many candidates, this is an important reminder about what voters really care about.  

Another reason that Trump is likely to be reelected is that none of the leading Democratic candidates have created much enthusiasm among voters. Former vice president Joe Biden is currently leading in polls with about 30 percent of Democratic voters’ support, but he has failed to move beyond that level. Moreover, Biden, who is turning 79 next year, has made many gaffes that are creating concern within the party.

Bernie Sanders clearly created excitement in 2016 within the party, when he came out of nowhere to significantly challenge party favorite Hillary Clinton. At that time, Sanders had unique policy positions among Democrats. However, several candidates, including Elizabeth Warren and California’s Kamala Harris, have adopted policy positions similar to those of Sanders, who is polling at around 15 percent and has been stagnant at that number for months. This has to be a disappointment after Sanders’s 2016 performance.

Elizabeth Warren is also polling at around 15 percent, which is higher than her standing earlier in the year. Warren is perhaps the one candidate who seems to be trending positively. Kamala Harris, who reached as high as 20 percent in the polls after the first Democratic debate, in which she took on Biden, is back down to seven percent, and is not even dominating in her state of California.

Pete Buttigieg, who is number two among all Democratic candidates in fundraising, is polling at around 5 percent.

The failure to develop and articulate growth-enhancing economic policies is in my view an important reason why none of the Democratic candidates have generated much excitement among voters. Of these five leading candidates, Sanders, Warren, and Harris have either created or strongly support policies that depart significantly from free market principles. Buttigieg and Biden not as much, but are certainly pivoting in that direction.

These policies include “Medicare for All,” which would de facto eliminate private health insurance and place everyone under a single-payer plan. In such a plan, a politically appointed board would decide what health services would be covered and how much would be paid for covered services. Every single-payer health plan that has been implemented in other countries experiences severe rationing, in that one may wait a very long time for treatment. In England, cancer patients often wait more than two months to begin treatment, even with an urgent referral from their primary-care physician. Not surprisingly, survival rates for some cancers are lower than in the United States.

Moreover, cataract surgery, which is extremely common and highly successful, and which can mean the different between blindness and very good vision, is often not covered in the United Kingdom. As always, it is those without money and political influence who suffer the most in these types of systems. Patients who can afford the $10,000 cataract surgery pay out of pocket. Those who cannot afford to pay out of pocket are out of luck.

Most leading Democratic candidates also support the “Green New Deal,” a collection of initiatives that range from reducing carbon emissions to various social and cultural programs that could cost as much as $93 trillion, and which would most likely not pass a cost-benefit analysis.

Among the five leading candidates, Biden and Sanders are approaching 80, and may have missed their opportunity for election. Biden’s gaffes will ultimately catch up to him, and Sanders is no longer generating nearly the same level of excitement as in 2016. Harris’s inability to maintain enthusiasm after her strong performance in the first debate suggests that she may be fading. Buttigieg needs to overcome the fact that he is extremely young and that his experience is limited to being the mayor of a shrinking Rust Belt city.

This leaves Elizabeth Warren, whom I suspect will be the Democratic nominee. However, Warren has proposed legislation that would damage economic growth considerably. This includes her “Accountable Capitalism Act”, which would require that 40 percent of corporate board seats be elected by employees, and that corporations make decisions that are not just for their shareholders but are for the “common good”. If passed, this would not only depress economic growth but would also likely result in corporations doing even less for society than they are doing now.

Warren also plans to tax wealth at a rate of up to a three percent. This might seem like a small tax, but it is in fact very large once we consider the rate of return to investment, which ranges from less than one percent on US Treasury Bills to about seven percent on stocks. Note that a three percent tax would generate negative returns for any investment earning less than a three percent return, and it would also imply a 42 percent tax rate on an investment earning seven percent. This tax would substantially reduce capital accumulation and economic growth.  

From a policy perspective, there were Democratic candidates who supported much more moderate economic policies, such as former Colorado governor John Hickenlooper, who was booed off the stage at the California Democratic convention when he argued against socialist policies. Hickenlooper recently dropped out of the race after polling around one percent. Minnesota senator Amy Klobuchar is another moderate candidate, though she may drop out of the race in the coming months, as she is also only polling around one percent.

Whether the Democratic nominee is Warren, or one of the other leading Democratic candidates, they most likely will be proposing politically much more liberal policies than Trump. And despite the recent sea change in Democratic party politics and policies, surveys show that only a minority of independent and registered Democratic party voters are supportive of the very striking shift in Democratic party policies.

Even though many polls show Trump will lose next year, this may simply reflect respondent’s personal views about Trump. When it comes time to vote, voters historically have cast ballots based on their wallet. The current level of economic performance suggests a Trump reelection. Fair’s forecast was one of the very few that predicted Trump would win in 2016, and Fair’s forecasts rarely have been wrong.