The Road to Freedonia

The investment case for the United States depends on the strength of its institutions as this chaotic campaign gets underway

Tomorrow's New Hampshire primary launches one of the longest U.S. general election campaigns on record with the two likeliest candidates already squaring off. That groan you can hear from Anchorage to West Palm Beach is the sound of the American voter bracing for the grinding months ahead.

For the record, I think one candidate has superior character, better policies and a stronger commitment to preserving and protecting the Constitution. And I think the other candidate … doesn’t.

But for this exercise consider America’s political headlines from the perspective of an international investor assessing the prospects of “USA Inc.” After decades of reliable growth and constant reinvention, the country’s unraveling political consensus and spendthrift habits have started to echo chaotic and cash-strapped Freedonia, the mythical movie republic literally run by clowns. Is now the time to cash out?

Rarely have voters (or investors) been able to choose between two candidates knowing exactly what they will get. Set aside their ages, personalities and looming court cases to look at their political programs.

President Joe Biden promises a traditional American role that strengthens alliances in Europe and Asia to stare down China and Russia. He wants more taxes on the rich, more “middle class” jobs and more subsidies for the climate transition.

Former president Donald Trump wants to disengage from American commitments to Europe's defense, de-couple from China and severely restrict immigration. He'd like to cut taxes again (especially for corporations), raise tariffs again (including on allies) and provide tax breaks for oil, gas and coal production.

In some ways, this election should be as simple for U.S. voters as Ronald Reagan's classic 1980 question when he defeated Jimmy Carter: “Are you better off today than you were four years ago?” The economic data don't actually give a clear answer. Excluding the disruption from the pandemic, unemployment and growth have been mostly the same under both presidents.

Real disposable incomes grew under Trump while any nominal gains under Biden have been eroded by higher inflation. Economists largely blame snarled supply chains for the higher prices. In retrospect, Biden and Fed chair Jerome Powell bear some responsibility for large stimulus programs and a late tightening cycle, but it’s also easy to forget the risks of a much deeper recession at the time.

The dirty secret is that the president doesn't have much to do with the current economy, which is buffeted by long economic cycles far beyond the reach of the Oval Office. Outside the Federal Reserve, most economic policy merely plants seeds that shape investment, wages and productivity over many years.

Whoever wins in November won’t get to plant the seeds he wants, since he is unlikely to have full control of Congress. So our global investor will have to look through the current political circus to see where America is headed under either outcome.

The United States of Freedonia isn't inevitable, but neither is that durable liberal democracy we'd all like to see.

For all the uncertainty around November 5, the country’s trajectory is highly predictable in important ways.

First, there will be more confrontation with China. Trump has proposed a ban on all “essential” imports (including steel, electronics and pharmaceuticals) within four years. Biden’s team has restored some military and economic consultations but continues to restrict trade and investment and threatens more sanctions over Beijing’s threats to Taiwan.

Second, the overall U.S. market will be harder to crack amid a rising array of tariffs and subsidies. While Biden has not gone as far as Trump’s proposal for a sweeping 10% tariff on all imports, he is far more comfortable with trade restrictions and tax breaks he believes will protect American jobs.

Third, immigration laws will tighten even after the current border crisis is resolved. While Biden has tried to keep a door open for humanitarian refugees from Afghanistan, Ukraine and Venezuela, the country’s mood has aligned behind efforts to “control the border,” which may have long-term implications for the country’s workforce as fertility rates drop.

Fourth, debt will grow still further with neither candidate ready to seriously take on reform of Social Security and Medicare. With one party intent on cutting taxes and another still identifying areas needing more government support, the U.S. will be borrowing much more.

Finally, regardless of the winner, America’s institutions – its military, courts, regulators and traditions – are in for significant stress. A Trump loss will leave many voters believing in a stolen election, while a Trump victory will hand power to a candidate who has promised “retribution” against political opponents.

A more confrontational, protectionist and insular America hardly seems like a great formula to extend its record of economic vitality and creativity. But outsiders looking in will have to balance these risks with the country’s enduring attractions, including its geographic isolation and energy independence, deep capital markets and reserve currency, research universities and entrepreneurial culture.

Americans will have to grit their teeth and vote, because there really is a clear choice on policy, style and political philosophy. Global investors will try to look past the results in 2024 or even 2028 to assess if the American institutions that have mostly managed to keep political excess in line so far will withstand the current turmoil.

The United States of Freedonia isn't inevitable, but neither is that durable liberal democracy we'd all like to see.

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