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Tuesday, 12 December 2017

This election will be good for labor, bad for capital

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  • James Saft - June 2014

The 2016 US presidential election is a circus which will produce an outcome and policies that will tend to fatten labor’s share of the economy while reducing that of capital.

And yes, that means there may be more emphasis not on growing the pie but on how it is divvied up, a factor which might possibly depress longer-term growth and would definitely tend to drive profit margins lower.

Super Tuesday is past and now Democrat Hillary Clinton and Republican Donald Trump look to be on rails to their parties’ nominations.

I am assuming Trump loses in a general election, as betting and polling now indicates. If he wins, I wish you the best of luck with your investments. You will need it.

I won’t spend too much time working through what would happen if his policies, as now laid out, are put in place, because I don’t think it is at all likely they ever will be or even that they answer to the term ‘policies’. Suffice to say that we will have volatility during the election season, with risk premia rising to take the Trump factor into account.

Yet Trump’s rise is significant in a way that goes beyond “where have we gone wrong?” soul searching.

Investors shouldn’t so much worry about what President Trump would do, as he likely won’t get a chance, but rather take a hard look at the broader underlying forces which might continue to make themselves felt after his candidacy. And no, I’m not talking about stupidity and folly, though they too won’t fly back to New York with him in Trump Force One when this is all over.

Hillary Clinton is being forced left of her natural position by both her primary opponent, Bernie Sanders, and by Trump in a general election. While of course she will run against Trump’s more outrageous positions on, well, everything, she is smart enough and well advised enough that she will grasp that to win she must appeal to the voters whose economic vulnerability Trump exploits.

Sanders, and Elizabeth Warren, have been successful in pushing Clinton to the left in financial services regulation, and given that this too is undergirt by Main Street’s sense of being cheated by forces beyond its control, it is likely she’ll keep going in this direction as she squares off against Trump.

Stronger financial regulation probably means slightly lower growth in the near term, but with the hope that we face fewer destabilizing booms and busts. Longer term that could actually be good for asset prices, but in the near term it means less leverage and is probably a negative for returns.

Labor share

Trump’s positions on immigration and trade, though ranging from wrong-headed to outrageous, are popular, at least in part, because voters in middle- and lower-income groups have seen their share of the pie decline, not for years, but for decades.

Wages and salaries are now 43.8% of GDP, up very slightly from all-time lows in 2010 but still in a long-term downtrend which started above 50% in 1969.

Corporate profit margins have moved in roughly the opposite direction, upward, for roughly the same amount of time and are now not far off of all-time highs.

Globalization has been great for capital and for people at the very top in the US with the skills to surf its wave. That it has also been good for many in India, Mexico and China who have been lifted out of poverty is not a point which will get much airing between now and November.

What may well get more attention are policies which might protect US jobs, or which might raise US wages, especially in the bottom 80% which globalization has hurt. Within this context, it may not be a surprise that the US just imposed a 266% tariff on imports of some steel from China and a lesser range of tariffs on six other countries.

Though I wouldn’t expect a trade war from a Clinton administration, it will be keen to be seen to be willing to fight the corner of US wage earners, and perhaps less sensitive to the competing demands of multinational corporations. I cannot imagine a Clinton administration approaching a trade deal in the same corporate-friendly spirit as the Obama White House took to the Trans-Pacific Partnership.

Taxation too will probably be more redistributive than in a world where Trump elected to stay home. Trump’s longest-lasting legacy might be that he leaves Republican economic orthodoxy of low taxes and hope for growth fatally wounded.

These outcomes may be for good or ill, but what they will be is bad for corporate profit margins in aggregate.

(James Saft is a Reuters columnist. The opinions expressed are his own. At the time of publication he did not own any direct investments in securities mentioned in this article. He may be an owner indirectly as an investor in a fund. You can email him at jamessaft@jamessaft.com)

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