Thought of the Week:
Before becoming a university professor and management consultant, my father was a small college basketball coach. He brought that experience to coaching both my and my sister’s youth teams. Unlike some of the other squads coached by parents, we were the youngest of teams to go through organized warm- up drills, start games using a full court press, and switch defenses between zone and man-to-man through hand signals. My father was an old school coach—unless on a fast-break, he wanted to see at least three passes before a shot was taken, and as a point guard, trust me, I saw the bench more than once for not getting back on defense and not using the backboard on a layup. A few of his favorite lines were, “Hey, have fun out there, but remember losing is no fun,” and “If you play your game, this team can’t beat you, you can only beat yourselves.” Despite the top line numbers in the most recent political polls, we’re beginning to hear a version of that last line from a growing number of political consultants and think tanks framing the presidential election. Just this week, an AEI analyst ran a piece subtitled: “I don’t think Trump can win…but Biden could lose.” The common thread in the reasoning is that although it’s accurate to report that former President Trump leads President Biden in six of the seven key swing states—Pennsylvania, Michigan, Wisconsin, Nevada, Arizona, North Carolina, and Georgia—it’s more accurate to say that Biden trails Trump. Just as my father preached in our team huddles to play our game and not beat ourselves, what is interesting about today’s polls is how Trump leads Biden. In each of the current swing state polls, the former president has nearly equaled his performance from the 2020 general election, meaning he’s basically starting right where he left off; meanwhile, Biden trails his 2020 tallies. Using poll averages across the seven states, Trump is underperforming his 2020 vote share by just 1 point, but Biden is lagging his 2020 result by 5.9 points, which suggests not that Trump is taking votes from Biden, but that Biden’s 2020 supporters haven’t all turned out yet. A similar trend holds across the individual swing states—in Michigan, Trump is off his 2020 game by just a little more than half a point, while Biden lags his former pace by almost 8 points; in Georgia Trump is within a tenth of a point of his 2020 performance, while Biden is 4 points behind his old pace; in North Carolina Trump is only 1.1 points off of his 2020 showing while Biden is underperforming by 4.9 points; and similar circumstances hold in Arizona, Wisconsin, and Nevada. Pennsylvania is the only state where Biden leads, 46.5% to 45.9%. However, even in the Keystone state, Trump is 2.8 points behind his 2020 performance while Biden misses his prior mark by 3.4 points. Pointing to a key dynamic under the surface of this election and where the weirdness of a repeat election comes in, it seems to be no coincidence that Biden’s best state is also his least bad state. If Trump were truly winning the swing states, we would expect to see him outperforming his 2020 numbers as he takes votes away from Biden. But, to an uncanny degree, Trump has settled right back into his old groove. In other words, Trump isn’t necessarily winning, but Biden is beating himself by dramatically underperforming his prior performance. Although it’s tempting to center on the weaknesses inherent in both candidates, in terms of predicting outcomes, going forward, it may be more important to focus on changes in voter sentiment to see if they have any impact on missing Biden voters—as the economy improves, do a portion of Biden voters come back into the fold; and what about young voters, do they return to the president with policy changes on Israel and student loan forgiveness? We’ll see. Former president Trump, who has always had a high floor and a low ceiling of support, appears to be topping out. For President Biden, he’ll lose this election if swing state voters don’t return to the fold, but if they do, the incumbent has room to grow.
Thought Leadership from our Consultants, Think Tanks, and Trade Associations
Committee for a Responsible Federal Budget Reviews Trump’s Call for 60% Tariffs on Chinese Imports. In addition to his proposed 10% universal baseline tariff, former President Trump recently proposed implementing a 60% tariff on imports from China. Although this would generate $2.4 trillion of net new revenue on a static basis, it would ultimately produce far less revenue, or even lose revenue once changes in trade behavior are considered. Specifically, under conventional scoring, estimates show it would produce no more than $300 billion over a decade and could lose $50 billion, and on a macrodynamic basis, it would likely lose revenue. Under current projections, the U.S. will import roughly $5.6 trillion of goods from China between FY 2026 and 2035 at an average tariff rate of 10% (up from 3% in 2017). These estimates imply that raising tariffs to 60% would increase customs duties on Chinese imports in FY 2035 from $65 billion to nearly $400 billion and would generate $2.4 trillion of net revenue over a decade on a static basis after accounting for income and payroll tax revenue offsets. However, assessing the policy on a static basis does not provide a meaningful revenue estimate. In fact, such a large increase in tariffs would dramatically reduce trade with China and lead to far less revenue than the static figure implies. Assuming elasticities consistent with trade theory, the tariff increase would reduce imports from China by 85%. Under this scenario, despite higher tariff rates on remaining imports, tariff revenue on Chinese goods would fall from $65 billion to $55 billion in FY 2035. Assuming Chinese imports are replaced entirely by domestic production, the Treasury would absorb nearly all the revenue loss. If, on the other hand, replacement goods were imported from other countries subject to Trump’s proposed 10% baseline tariff, tariff revenue in FY 2035 on Chinese imports and their replacements would grow to above $100 billion.
Eurasia Group Says Johnson Faces a Decreasing Risk of Removal as Security Package is Teed Up. House Speaker Johnson (R-LA) will reportedly release his proposal for security aid to Ukraine, Israel, and Taiwan by early next week; an aid package is likely to pass (80% odds), although a final vote is unlikely until late April. Speaker Johnson faces a decreasing risk of removal over his decision to advance an aid package; far-right Reps. Gaetz (R-FL), Donalds (R-FL), Higgins (R-LA), and Norman (R-SC) are openly opposed to removal, with several other Freedom Caucus members expressing opposition to another speaker fight in the run up to the election. With hardliners backing away from threats of removal, conservatives have little leverage to block a vote on aid; however, Johnson is not out of the woods entirely, and he will need to add amendments that sweeten the pot for his conference—namely, ending the White House pause on LNG export approvals and/or allowing the U.S. to seize Russian assets to offset the cost of aid. The Speaker will also likely propose reductions or changes in the makeup of the aid itself, shifting resources to cover U.S. defense replenishment efforts and using Lend-Lease authority to cover a portion of the aid.
Observatory Group’s Observations on the Fed’s Near-Term Rate Cut Calculus. The FOMC wants to be confident that a pattern of inflation consistent with its 2% target has reemerged before cutting rates. After several disappointingly high core inflation numbers, it will take a minimum of three good reports to re-establish a pattern consistent with the target. For the near term, the question is whether a June cut is out of reach. Truth is, the path to a June cut is extremely narrow and may well be closed off after this week’s release showing March CPI data remaining stubbornly elevated. With core CPI also rising, a June rate cut is no longer definitive as the timing of any rate cut is a function of inflation data far more than other factors. Also, the strength of the economy means there is no urgency to cut. So, watch the employment report, but know that it is not a major factor in the near-term policy debate. The lack of urgency means that unless a sufficiently benign inflation pattern clearly re-emerges in the next few CPI reports, the easiest choice for the Fed is to wait. Indeed, policymaker comments about needing more information or confirmation about inflation before pulling the trigger on cuts have begun to include a reference to the lack of urgency. In other words, a June cut may not happen even if the next two months of core inflation data are back on track toward the 2% pace. Policymakers can afford to require more confidence in a better inflation trend before cutting than they would if economic activity were weak or weakening. June remains an option only if the next reports rebuild confidence in inflation settling at the 2% target. Overall, the threshold for waiting to cut rates until after June is low, while the threshold for a June cut is high and could be demonstrated to be unreachable depending on the inflation data. The mean likelihood of three rate cuts in 2024 has been reduced to 2, and a 1 cut median may be reasonable if the April inflation data is another disappointment. If the May CPI does not break the pattern, then a median of zero cuts cannot be dismissed.
“Inside Baseball”
Politico reports that former president Trump has tightened his stranglehold on the congressional GOP’s policy agenda, reshaping party orthodoxy on national security and social issues. Trump’s sway has been on full display this week—as the House tried to take up a government surveillance bill intended to unite the party, the former president pushed to “kill” reauthorization of the Foreign Intelligence Surveillance Act, and 19 House Republicans did just that. He’s also successfully nudged most anti-abortion conservatives to accept his call to abandon a national standard, once a consensus position in the GOP. These actions were on top of Trump’s long-standing opposition to new Ukraine aid, which remains stalled on the Hill. So far, Trump has shown more proclivity for blocking GOP policy proposals than shaping them. Consider that his actions on the bipartisan border deal and support for higher tariffs, while firm rebukes of past GOP stances, aren’t drawing the friendly fire they did during his first term. All signs point to a far more Trump-ified Washington until the November election, and a super-charged one should he win the White House. In fact, many senior Republicans who served as establishment bulwarks against his influence are retiring or ceding power, as in the case of Senate Minority Leader McConnell’s (R-KY) plan to exit leadership this year.
In Other Words
“One can, as I do, oppose Donald Trump and all he stands for, and still be disturbed by the weaponization of government against him,” presidential candidate Robert F. Kennedy Jr.
Did You Know
According to NASA, the next total solar eclipse that will be able to be seen from the contiguous U.S. will occur on Aug. 23, 2044.
Graph of the Week
U.S. Coal Exports to Decline Due to Baltimore Bridge Collapse. U.S. coal exports will decrease with the collapse of the Francis Scott Key Bridge in Baltimore, which cut off access to the nation’s second-biggest coal port. According to the Energy Information Administration (EIA), coal exports were projected to rise 1% in 2024, but revised estimates following the collapse now forecast coal exports to decrease 6%. In the short-term, the disaster will push exports down 33% in April and 20% in May. Although coal exports are expected to recover toward the end of the summer, there is significant uncertainty based on the timeline for port reopening and how quickly exporters can adjust through alternative ports. In 2024, national coal exports will drop to 94.5 million tons, but rebound in 2025 to 105 million tons. While the U.S. produced 580 million tons of coal last year, a slight drop from 2022, the EIA projects decreases in production to 485 million tons this year and 464 million tons in 2025.
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