Election and the Economy

In October 2016, I warned that in advance of the presidential election, “you should not make changes to your portfolio in an effort to outfox the tried and true investment strategy of identifying your personal goals and objectives; creating and sticking to a diversified asset allocation plan, using low cost index funds; and rebalancing two to four times a year.”

Four years later, I am sticking to that guidance, so let’s just pinky-swear that you won’t try to adjust your investments or time whatever market movement you expect, and I promise not to lecture you about the folly of trying to time the market (at least in this post), OK?

With that said, the upcoming election has drawn a clear distinction between how the two candidates view the economy, the functional role of government, as well as the old school, meat and potatoes issues of taxes, trade and regulation.

To help guide me through the issues, I spoke to Nathan Sheets, the chief economist and head of global macroeconomic research at PGIM Fixed Income. Prior to his current position, Sheets spent a large portion of his career in government-related jobs at the U.S. Treasury (under the second Obama Administration), at the Federal Reserve Board, and at the International Monetary Fund.

Sheets is a self-described middle of the road, economic wonk. As such, he is more clinical, than emotional when discussing the candidates’ differences. With the benefit of almost four years in office, Trump’s priorities are easy to pinpoint: an emphasis on a domestic trickle-down tax policy (the 2017 tax cuts mostly benefited corporations and the wealthiest Americans) combined with an easy regulatory environment (especially as they pertained to the environment, labor, financial services and investor protections), in order to spur economic growth. The Trump economic agenda came against a backdrop of his heightened skepticism of free trade, globalization, and international cooperation.

I asked Sheets to grade Trump’s performance on the economy throughout his first term and he responded, “Through 2019, I would give him a B-, because the economy did see above-trend growth.” But Sheets noted that Trump himself might have caused his grade to be lower, because of the uncertainty and fallout that his trade conflicts created.

The motivating thought behind Biden’s policies, according to Sheets, is that the government should address the economic inequalities that have formed by enacting policies that would beef up the nation’s social programs and reverse portions of the Trump tax cuts. A Biden Administration would likely increase the highest corporate tax rate from the current level of 21 percent to 28 percent (before the Trump plan, it was 35 percent) and also would hike taxes on households that make more than $400,000.

Under Biden, there could also be higher tax rates and new brackets on the wealthiest earners, as well as an increase in the capital gains rates. (As a reminder, the tax changes for individuals are set to sunset after 2025.) Additionally, Biden would likely return to an Obama-era regulatory regime, which would forgo short-term growth for long-term sustainability.

Meanwhile, with millions of Americans out of work and the economy laboring under the weight of the pandemic-induced recession, Sheets believes that whoever wins should immediately start the new term with economic stimulus, which would help individuals, the source of economic demand; and companies and municipalities, which are the main sources of job creation.

Although more spending would add to the national debt, Sheets says until the nation returns to its pre-pandemic level of economic output, deficits and the overall debt level should go to the back burner.

Without government action on stimulus, Sheets fears that the scaring created by COVID-19 could result in permanent job losses and less productivity in the future.