April 7, 2023

Thought of the Week

On the same day I had lunch with one of Delta Airlines’ federal lobbyists and dinner with a small group of energy analysts, which included several former Trump administration EPA officials, President Trump was indicted. The indictment and subsequent arraignment made political history—Donald Trump became the first of America’s 46 presidents to be charged with a crime and forced to surrender to authorities. While cable news and talk radio covered the story relentlessly, and DC bars offered “when it arraigns, we pour $5 drafts,” $10 “Dark N’Stormy Daniels,” and “IndictMINT Juleps,” for the most part, the overall reaction has been muted—a “been there, done that” sort of vibe. Sure, you’ll find people who exclaim, “Finally! Jail him now,” and others who view the whole thing as political charade and theater, but generally people in Washington just seem tired of the former president and wish he would go away. Maybe it’s because Congress is in the middle of a two week recess, but the love for and hate of the former president just doesn’t feel as visceral on the ground as it once did. Hundreds of miles away, at Augusta National for Monday’s Masters practice round, I heard no discussion of the coming arraignment, despite former President Trump’s links to the controversial Saudi-backed LIV golf league. There, talk was about Tiger’s leg; whether this was the year Rory would break through to complete the career grand slam; and can anyone beat Scottie Scheffler (answers: it’s really bad; no; and we’ll know Sunday). Although the arraignment was just two days ago, the political news cycle seems to have already moved on—to the elections in Wisconsin, the party switch that occurred in North Carolina, the expulsion of two members from the Tennessee General Assembly, and the gifts received by Justice Thomas. However, according to our own conclusions and those of analysts we’ve spoken to, the indictment will have a number of important ramifications, including:  

  • The decision, by a progressive prosecutor to elevate a misdemeanor to a felony on the weakest of charges, will be incredibly polarizing;
  • The indictment improves election prospects for the former president—the ability to dominate the news cycle on the back of a case that will play out over the course of the nomination process raises Trump’s odds to better than even to secure the Republican nomination;
  • The indictment is nominally positive for Biden—polls indicate that Trump is the weakest of potential candidates in a head-to-head match against the current president;
  • The need to get behind a possibly multiple indicted president reduces the political legitimacy of the Republican party and will be corrosive to U.S. political institutions;
  • Because President Biden’s approval ratings remain low in historical context and will be under significant pressure if the economy continues to underperform, the possibility of Trump winning the presidency is significant and plausible.
  • Media coverage of the campaign will pick up, and political polarization could return to where it was during the 2020 election—divisive, toxic, and potentially violent; and
  • Internationally, the presumption has been that the Trump administration was an anomaly; a Trump nomination would immediately raise concerns, make Biden look weak, and leave any U.S. international commitments less viable.

Thought Leadership from our Consultants, Think Tanks, and Trade Associations

Bloomberg Reports that EV Credits Will Remain Elusive in U.S. Bid for Auto Renaissance. The Biden administration’s requirements for electric vehicle tax credits will reduce the number of models eligible for incentives until tens of billions of dollars of new investment in U.S. manufacturing kicks in. Guidance released last week clarifying provisions of the Inflation Reduction Act (IRA) leaves few EVs eligible for up to $7,500 in credits. The reason: most don’t meet new requirements that battery components or critical minerals are sourced from North America or U.S. free trade partners. While the global auto industry eagerly anticipated the Treasury Department’s notice, with lobbyists pushing for months to loosen up the sourcing and content requirements, tax credits for consumers included in the legislation will be difficult to attain. However, those incentives and additional perks for manufacturers have helped trigger announcements of more than $52 billion in EV and battery investment in the U.S. Treasury has left unclear how it will deem companies to be foreign entities of concern, those which automakers will not be able to turn to for battery components and critical minerals in the years to come. One of the overarching goals of the IRA is to make the U.S. less reliant on China, which currently dominates the EV battery supply chain.

Eurasia Group Says China’s Muted Reaction to the McCarthy-Tsai Meeting Reflects a Cautious Approach. While China has initiated military exercises and threatened to expand maritime enforcement actions in the Taiwan Strait in response to House Speaker McCarthy’s (R-CA) meeting with Taiwanese President Tsai Ing-wen, that response, while notable, appears less severe than the one to then-Speaker Pelosi’s 2022 visit. Speaker McCarthy’s decision to forgo a trip—and the political benefit of looking tough on China at home—suggests that lawmakers are increasingly aware of the escalatory risk that high-profile trips to Taiwan pose. The Chinese response was also tempered by the fact that Chinese President Xi is currently meeting with EU Commission President von der Leyen and French President Macron; an aggressive reaction coinciding with those meetings would undercut China’s efforts to convince EU nations not to back threats of U.S. sanctions. The bipartisan nature of the U.S.’s meeting with Tsai also contributed to a more cautious approach from the American side. However, that cautious approach doesn’t rule out the hawkish trajectory of U.S. policymaking, nor does it rule out additional Congressional visits to Taiwan. In fact, House Foreign Affairs Chairman McCaul (R-TX) announced after McCarthy’s meeting that he was in Taiwan on a previously unannounced bipartisan delegation trip. While McCaul’s visit was much lower-profile than a McCarthy visit would have been, it is likely that additional visits will occur and could still prove to be important inflection points in the U.S.-China relationship. Congress is also unlikely to pivot away from China-focused legislation and hearings, including proposals targeting Tik Tok. In fact, the House China Select Committee began a series of meetings this week with tech and entertainment executives as part of an upcoming push to examine Chinese influence in the tech and entertainment industries.

Observatory Group on Politics, Demographics, and Polarization…the near term: Former President Trump’s indictment(s) are likely to help him win the GOP presidential primary next year; from a Democratic point of view, among declared and prospective candidates, Trump is the best candidate to face President Biden; meaning that the indictment(s) are net positives for the prospect of a second Biden term. The potential for a Biden-Trump rematch has raised talk of a third party centrist candidate emerging; No Labels is the group in particular floating this idea. The base case is that any third party candidate would be better serve the GOP nominee, Trump or otherwise, than President Biden. As a result of anti-Trump sentiment and its effect on boosting Democratic turnout, from a congressional standpoint, a Trump candidacy raises the odds of Democrats re-taking the House. However, due to the difficult election map, the Senate will be very difficult for Democrats to hold, regardless of who the GOP nominee turns out to be. The primary impact of a GOP Senate in a second Biden term would be difficulty getting judicial and executive branch nominees approved. Abortion is the single biggest issue trending in Democrat’s favor heading into the 2024 election. After the Dobbs ruling, abortion flipped to being a “single issue” for more Democrats than Republicans. There’s no question that with abortion the Supreme Court and many GOP states are out of step with the wider American electorate, particularly on the severity of restrictions a number of states have been passing. The GOP is likely to pay for these actions next year with swing voters and Democratic enthusiasm. The narrative heading into the 2022 midterms that voters would focus on inflation and other pocket book issues, leading to a red wave, turned out to be wrong. Abortion and democracy were motivating factors, which limited GOP gains, and should be expected to hold sway again next year…And the longer term: Demographically, there’s been a distinct reversal between the GOP and the Democrats. The GOP used to be the party of Wall Street and Main Street, whereas Democrats were the working class party. It’s now the case that most working class voters are Republicans, while most college educated are overwhelmingly Democrats. Importantly, Republicans are picking up marginal but relevant percentages of Hispanic and black voters, particularly those who identify as “conservative.” An increasing portion of GDP is represented by counties voting Democrat (71% of GDP for Biden, 29% for Trump in 2020 versus 64% Clinton, 36% Trump in 2016). Life expectancy and health outcomes follow this trend, as well as per-capita incomes, creating what analysts refer to as a winners/losers divide between the parties, which also splits along an urban v. rural divide. The polarization shows no signs of abating. Increasing party loyalty (both the GOP and Democrats vote 90+% for their party’s candidate no matter what) means elections will be close no matter who’s running, and the shrinking number of swing voters (4-5% of all voters) will be even more important. As a result, both parties will focus on turning out their base voters rather than trying to convince swing voters, increasing policy polarization, decreasing the likelihood of moderates being elected, and reducing the scope of policies where bi-partisanship can be achieved.  

“Off the Record”

The short history of post-Dobbs electoral politics is clear. Since the Supreme Court handed down its opinion, Democrats have gained control of four state legislative chambers while losing none of the ones they already controlled; added a seat to their majority in the U.S. Senate; and kept losses in the House to a minimum. This week, a high-profile election in Wisconsin showed the degree to which swing state politics can change based on the issue of abortion—a progressive candidate defeated a conservative candidate by a full 10 points, underscoring the importance of abortion access as a motivating issue for Democratic voters ahead of 2024. In fact, abortion remains such a politically potent issue that if the GOP cannot get their position closer to where voters stand, Wisconsin may no longer remain a swing-state. Total bans are losers in swing states, and Republicans who insist on them may find that electoral defeats will lead to even more liberal state abortion laws than under Roe; Michigan being a case in point. Nationally, Florida Gov. DeSantis does not seem to have learned the lesson and is set to sign a bill that bans abortion after six weeks. While the new law may de-fang attacks from potential 2024 Republican presidential primary rivals, there is a significant gap between what motivates a party’s base during primary season and what wins general elections. On abortion, this gap is widening for the GOP.

In Other Words

“Not guilty,” former president Trump from his seat during a hearing in the Manhattan Supreme Court.

“I am the Speaker of the House. There is no place that China is going to tell me where I can go or who I can speak to, whether you be foe or whether you be friend. I’m not the general manager of the Houston Rockets,” Speaker McCarthy on his meeting with Taiwan’s president.

Did You Know

Multinationals (U.S. and foreign-based) employ more than three out of every 10 American workers; 37 million private-sector workers out of a COVID-depressed 120 million total. Employees of multinational firms as a share of total U.S. private-sector employment:
2020        31%
2019        29%
2012        26%
2002        26%
1992        25%

Graph of the Week

U.S. Consumer Confidence Increased in March—People Still Plan to Spend. Consumers remain cautiously optimistic about what lies ahead. While the Consumer Confidence Index (CCI) rose slightly in March, it still lags the 2022 average; at the same time, expectations of inflation over the next year remain elevated at 6.3%.


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