How Would A Recession Affect The 2020 Election?
Three stories on my cell phone news app caught my attention today. The first was that the stock market set a new record high; the second stated that the current economic recovery/expansion, which began in 2009, is now the longest period in our history without an economic recession; and the third said the yield curve has just inverted. The yield curve shows the relationship between short-term and long-term interest rates. When it inverts (that is, long-term rates become lower than short-term rates), it is almost always a sign that the economy is about to go into recession.
Conventional political wisdom is that people vote their economic interest. When Bill Clinton was running against George H.W. Bush, his campaign manager, James Carville, famously posted stickers around their campaign headquarters that read “It’s the economy, stupid” to remind Clinton of this.
But when I listened to the two preliminary Democrat debates, I didn’t hear much talk about the economy. The candidates were clearly into identity politics, and going after the Latino vote, the LGBT community, women and African-Americans. They were promising a lot of free stuff — healthcare, college, abortions and reparation payments — all of it to be paid for by our $22 trillion-dollar-in-debt federal government.
Raise taxes? Only on the “one-percenters.” In true socialist fashion, they’ll just confiscate wealth and use it to finance all the “free” stuff they promise to voters.
If this is their version of “it’s the economy, stupid,” then Donald Trump will have little problem getting re-elected, even if the nation is in the midst of economic decline.
Trump has tweeted many claims and boasts about the economy that are, well, not quite factual. The economy under President Obama was not as bad as he has claimed it was. And his oft-repeated boast that he has created “the greatest economy in the history of our country” is far from true by an objective standard.
During the 2016 campaign, he claimed his policies would jump-start the economy and we would achieve annual GDP growth of 5 percent or more. That hasn’t happened; GDP growth under Trump has changed little from what it was under Obama. (No, that’s not fake news; look it up yourself.)
This does not mean the economy is doing poorly under Trump — over five million new jobs have been created while he has been in office — but his boastful tweets have set an awfully high bar by which he could be judged.
When Trump unexpectedly won the election in 2016, the stock market took off like a rocket. But was that because of Trump or were investors exuberant because Republicans now controlled both houses of Congress and they were certain to pass corporate tax reform that would increase corporate profits and spur investment? In January, 2017, the stock market fell nearly 10 percent. And it has bounced around for the last year and a half as investor exuberance has been replaced by investor uncertainty due to Trump’s trade wars and confusing foreign policy.
But the stock market is not a very good measure of the nation’s economy. There once was a time when it was, and people looked at indices such as the Dow Jones Industrial Average as an indicator of our economic future. But globalization changed that. Today, nearly half the profit of stocks listed on the S&P 500 index comes from overseas sales, and 15 percent of the U.S. stocks traded on the New York Stock Exchange are owned by foreign interests. Thus, what happens on Wall Street is not necessarily what is happening on Main Street.
The National Bureau of Economic Research (NBER) defines a recession as “a significant decline in economic activity spread across the economy, lasting more than a few months, normally visible in real GDP, real income, employment, industrial production, and wholesale-retail sales.” It says nothing about the stock market. Simply put, in a recession, business activity slows down or declines and a lot of people lose their jobs.
The yield curve is an important economic measure because when it inverts, that is an indication that investors are more interested in preserving their wealth by putting it into low-yielding but safe investments, such as long-term bonds, rather than trying to increase their wealth by investing in high-yield but risky enterprises. Much of this is the result of uncertainty, not just about the U.S. economy, but about the global economy. To paraphrase the poet John Donne: “no nation is an economic island.”
How would Trump react if the economy turns sour? I believe it is fair to say our president has never accepted personal responsibility for anything that has ever gone wrong. He is already blaming the Federal Reserve Board for the stock market’s malaise because it failed to lower interest rates as he wanted and he has threatened to fire its chairman — which he can’t do.
But more important, how would Trump supporters react if they believe his policies are hurting them financially? Trump was heavily dependent on the enthusiasm and turnout of blue collar workers and farmers when he won the 2016 election. Will these people rush to the polls as enthusiastically in 2020 if the economy is in a recession? If not, and the Democrats base their campaign on identity politics and free stuff, we could find ourselves with our first gay, female, Hispanic, socialist president or some such combination.