2020 Election Research: The Big Economic Shift

The following article will be one of a series which objectively cover the proposed policies of the 2020 Presidential candidates, including President Trump. The 2020 election represents the potential for one of the largest shifts in government policy during our lifetimes. Alongside this shift, proposed policies and their (potential) implementation will create major uncertainty for the economy. As we have learned over the past three presidents, the executive office is extraordinarily powerful and doesn’t require Congressional approval to create significant policy changes. Investors and businesses should understand the implications of the policy proposals from each candidate: we’ve created this series to facilitate that understanding.

This series will objectively review each candidates’ policies and their projected impact on a wide range of economic areas from jobs to taxes to trade. The goal is to provide business and investors with an understanding of how these policies will impact the future growth and economic direction of the country.

Having reviewed the leading Democratic candidates and President Trump’s positions, there are three major economic differences.

1. Democratic candidates propose tax increases on the top income brackets, raising taxes on corporations, and some candidates propose creating a wealth tax to pay for social spending on underserved areas of the economy, such as minorities and rural populations. President Trump and Republicans propose cutting taxes for individuals, pass-through entities, and corporations to generate economic growth.

2. Democratic candidates propose using regulation to improve the environment, to correct social injustice, and to improve workers’ rights and pay. President Trump and Republicans have attempted to change many of the Obama administration’s regulatory legislation and rules including; the Fiduciary Rule, Waters of the US rule, Clean Power Plan, and Volcker Rule.

3. Democratic candidates support improving, enhancing, and strengthening government involvement in healthcare. The proposals run the gamut from “Medicare for All” to “Medicare for all who want it” to single-payer. President Trump and Republicans failed to completely repeal the Affordable Care Act but did eliminate the individual mandate tax.

Over the next few weeks, we’ll attempt to peer through the haze of candidate rhetoric and hyperbole to find the core of their economic plans and what they would mean for job creation, growth, and the business environment. We’re going to review the current top 5 polling candidates, going from lowest polling to highest: Buttigieg, Harris, Sanders, Warren and Biden. This week, South Bend Mayor Pete Buttigieg.

Candidate: Mayor Pete Buttigieg

At 37-years old, Pete Buttigieg is the youngest Democratic 2020 presidential candidate and injects a Millennial viewpoint into the campaign. He has a compelling backstory: former U.S. Naval Reserve officer; Harvard graduate; Rhodes Scholar; consultant at McKinsey; a Christian; and mayor of South Bend, Indiana since 2012. He has called himself a progressive and his policy proposals appear to reflect this assertion. He has participated in two of the Democratic debates for president and has qualified for the next round.

Key takeaways:

1. Buttigieg’s economic policies stand in sharp contrast to the Republican corporate and individual tax cuts along with regulatory reform policies under the Trump administration.

2. If elected, there will be a major restructuring of significant portions of the US economy like energy and healthcare.

3. Expect a short-term, dramatic impact on the companies and relevant sector values until his policies are clearly delineated, communicated and enacted.

The “Issues” page on his campaign’s website is organized with 3 major headings: freedom, security, and democracy. Below are the listed plans from his website.

Latest Plans

· A Commitment to America’s Heartland: Unleashing the Potential of Rural America

· Securing a Healthy Future for Rural America

· An Action Plan to Combat the National Threat Posed by Hate and the Gun Lobby

· A New Rising Tide: Empowering Workers in a Changing Economy

· The Douglass Plan: A Comprehensive Investment in the Empowerment of Black America

· A New Call to Service

Here’s a list of bills he supports:

· The Raise the Wage Act;

· The Protecting the Right to Organize (PRO) Act;

· The Schedules That Work Act;

· The Healthy Families Act;

· The Federal Employee Leave Paid Act;

· The Paycheck Fairness Act;

· The Pregnant Workers Fairness Act;

· The Ending the Monopoly of Power Over Workplace harassment through Education and Reporting (EMPOWER) Act;

· The Bringing an End to Harassment by Enhancing Accountability and Rejecting Discrimination in the Workplace Act (BE HEARD in the Workplace Act);

· The Domestic Workers Bill of Rights Act;

· The Family Act; and

· The Rural MOMS Act, The MOMMA Act, Maternal CARE Act and MOMMIES Act.

Economy and Job Creation

To spark job creation, Buttigieg proposes to use a combination of regulatory changes and spending to drive changes to the economy and employment. Due to his campaign not specifically identifying economic growth and job creation as a major policy focus, the details of his plans are scattered throughout the proposals. While he doesn’t provide direct answers or specific policy proposals for many of the below tax topics, he uses language like “interested in”, “probably” and “there may be, yeah” to indicate his support and interest. Under all of these proposals, it’s difficult to estimate what the economic or job growth prospects will be. Nor is it easy to estimate the total spending costs. Below is a brief review of his proposals that fall into this category.

On corporate taxes, Buttigieg believes corporations are not paying their fair share and there is a need to consider both a higher marginal tax rate for top income earners and a wealth tax. He believes the size of the wealth tax should be similar to Sen. Elizabeth Warren’s $2.7 trillion proposal. He wants a more equitable use of the estate tax, particularly from the biggest and wealthiest estates. He is also “interested” in a financial transactions tax. Finally, he’s open to a middle-class tax increase if, “it is going to be reinvested and returned to the middle class in a way that makes us and the middle class better off.” (CNBC)

Under his “Unleashing the Potential of Rural America” plan, he wants to spend over $189 billion on a wide range of programs targeted at rural America. These include $80 billion for full high-speed broadband coverage; $50 billion on R&D for climate change; and $50 billion on “Resilience Hubs” to provide climate resilience data, tools, and support to communities.

Under his “Infrastructure” plan, his key policy states, “[M]ajor federal investment in clean water and wastewater infrastructure, transportation and mobility, rural broadband, and climate adaptation and resilience.” His website doesn’t list dollar amounts for the infrastructure proposal. It also doesn’t state whether the infrastructure proposal is separate from his Rural America plan, or if this is his Rural America plan.

Under his Inclusive Economy plan, his key policy states, “[T]he Walker-Lewis Initiative to spur entrepreneurship and job creation in underserved communities.” The goal is to triple the number of entrepreneurs from underrepresented backgrounds within 10 years and to create 3 million new jobs in minority communities and across the country overall. The proposal calls for the federal government to co-invest $10 billion with the private sector. In addition, it proposes to activate another $10 billion in private capital within 5 years. The Inclusive Economy plan includes a college loan deferral or forgiveness of Pell Grants for students that start and maintain a business employing at least 3 people within 5 years of leaving school.

On federal contracting, Buttigieg aims to award 25% of federal contracting dollars to small business owners from underserved communities. Finally, he proposes a “21st Century Community Homestead Act” to launch a public trust that would purchase abandoned properties and provide them to eligible residents in pilot cities, while simultaneously investing in the revitalization of surrounding communities.

On new regulations for business and unions, he has an extensive list of changes he wants to enact. Below are the major components he lists under the heading: “A New Rising Tide: Empowering Workers in a Changing Economy”.

· Raise the federal minimum wage to $15 per hour and indexing to wage growth;

· End “right-to-work” laws, which ban union security in collective bargaining;

· Deliver card-check rights;

· Guarantee workers access to paid sick leave and paid family leave, and the predictable hours and wages they deserve;

· Ensure that all workers can bargain with the companies that actually control the terms of their employment;

· Stop employers from permanently replacing workers who strike, enhancing workers’ rights to secondary boycotts;

· Take steps to prevent union election interference;

· Create safe, equitable, accessible, and fair workplaces for women and all people that are free of harassment and discrimination; and

· Include domestic workers, who have been historically excluded from many employment laws, in common workplace rights and protections.

One final interesting component is that Buttigieg wants to give preference in government contracts to firms that treat their workers well. “To give an affirmative leg up for high-road employers, Pete will support legislation to give preference in the bidding process for federal contracts to companies that are unionized and offer good pay and benefits to all their workers.” However, his website doesn’t provide details on what defines “good pay and benefits.”

Trade

On trade issues, the Peterson Institute for International Economics lists Buttigieg under the “Mixed or no positions on trade” category. (PIIE) While he’s against steel and aluminum tariffs, Buttigieg argues that NAFTA resulted in significant job losses. He would not support rejoining the Trans-Pacific Partnership trade accord citing lack of provisions on labor, environment, and the digital economy.

Energy and the Environment

Under Climate Change, he states a key policy: “Implement a Green New Deal with all available tools, including a carbon tax-and-dividend for Americans, and support major direct investment to build a 100% clean energy society.” Below are the additional policy areas:

· Increase energy efficiency in homes;

· Invest in building retrofits;

· Strengthen rural resilience and protect rural communities from environmental hazards;

· Decarbonize transportation and industry;

· Commit to the Paris Climate Agreement and collaborate with other countries to increase all our goals; and

· Convene state and local leaders for an agreement on community-driven carbon reduction.

The oft-cited American Action Forum research on GND estimates its cost to be between $52.6 trillion and $94.4 trillion with AEI estimating the yearly cost at $8.9 trillion. However, EPI’s Josh Bivens, director of research at the labor-funded Economic Policy Institute writes, “I’d say that it is *way* too early to even pretend to put cost estimates on the ‘Green New Deal.” (Factcheck.org) Clearly, there is disagreement over GND cost because the proposal is broad and vague. Furthermore, there is doubt as to whether current technology is sufficient for actually implementing the GND. While many will disagree with the total numbers as to the cost of GND, if implemented it would be a major change of the US energy structure with the goal of reducing and eliminating the use of fossil fuels.

Healthcare

Under healthcare, Buttigieg again attempts to walk a middle road between Sen. Sanders Medicare for All plan (cost estimate between $24 trillion and $36 trillion) and the Affordable Care Act (Obamacare). His plan’s key policy states, “Medicare for All Who Want It as a pathway to Medicare for All.” This plan provides a Medicare-type public option available on the Obamacare exchanges and invites people to buy into it. A public option would allow the government to provide a plan, negotiate directly with providers, and undercut all private plans to lead to a single-payer program like Medicare for All. Buttigieg has a separate plan for rural America covering a wide range of rural health needs and issues including the establishment of Health Equity Zones and expanding the Public Service Loan Forgiveness Program to include employment in rural private hospitals and practice groups.

Summary

South Bend Mayor Pete Buttigieg is an engaging and fascinating candidate for president due to his background, his policies and his Millennial lens for solutions to America’s biggest problems. His policies are aimed at protecting the environment, providing broad access to health care, and assisting disadvantaged communities. The direct economic impact of many of his policies is challenging to score and estimating the job creation impact is difficult. As an example, he proposes higher taxes on corporations and upper income individuals coupled with a significant wealth tax ($2.7 trillion) to pay for his numerous programs but doesn’t include the negative effects on economic growth from higher corporate taxes, reduced capital formation and wealth/capital flight out of the United States in his assessment. ( Mercatus Center, Tax Foundation, PWC )

On the positive side, Buttigieg proposals on broadband for rural America are targeted to the right place. The USDA states, “Reliable and affordable high-speed internet e-Connectivity, or electronic connectivity, is fundamental for economic activity throughout the US. Access to high-speed internet is vital for a diverse set of industries, including agricultural production, manufacturing, mining, and forestry and acts as a catalyst for rural prosperity by enabling efficient, modern communications between rural American households, schools, and healthcare centers as well as markets and customers around the world.” His plans would super-charge what the USDA is currently providing and would greatly help the 19.2 million rural households without connectivity. As well, this would greatly help farmers as their business increasingly is run via technology like drones, self-driving tractors via GPS and hedging on trading platforms.

Also, the focus on growing small business is critical for job creation. The Congressional Research Service (CRS) did an analysis for the Small Business Administration on job creation in the United States. The report found that start-ups with employees between 20–500 create the majority of new jobs. In other words, the firms that survive tend to grow and hire at very rapid rates. (NBER Working Paper) Therefore, policies to aid these fast-growing firms is warranted for job creation.

Like most of the 2020 Democratic presidential candidates, Buttigieg’s policies stand in sharp contrast to the recent Republican corporate and individual tax cuts along with regulatory reform policies under the Trump administration. Should Mayor Buttigieg be elected and put his policies in place, there will be a major restructuring of significant portions of the US economy like energy and healthcare.

In the short run, this would create significant uncertainty for businesses and investors as both attempt to first assess the likelihood of enacting these policies and then attempt to understand how they would work in practice. As an example of the uncertainties created, would “Medicare for all who want it” lead to the elimination of health insurance sector? Or, would the “Green New Deal” lead to the elimination of oil and gas companies? Or greatly reduce their value? As well, this uncertainty would likely lead to a reduction in capital expenditures and investment from both corporations and investors until a clearer path can be seen.

In the long run, addressing income inequality, underserved areas of the country, underserved populations, racial inequality and environmental issues are critical for the long-term health of our economy. For business and investors, the question is how best to achieve these goals to balance out the short-term negative effects of policies changes on the economy?

While Buttigieg’s policies would benefit specific communities and the environment, it would have to be balanced against the initial negative impacts of higher taxes, reduced capital formation and reduced investment. Given how large these changes would be, we can expect a short-term, dramatic impact on the values of the companies and sectors of the economy affected. Business confidence and value can only return in circumstances where policies are clearly delineated, communicated and smoothly enacted.

All urls used in this research piece are available at http://www.andrewbusch.com/research/

Andrew B. Busch is the former 1st Chief Market Intelligence Officer for the US government.

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