August 25, 2023

Thought of the Week:

Pre-Covid, my wife and I became empty-nesters. We lived in a farther out D.C. suburb where a one-way commute into the city routinely took an hour and a half. My wife worked remotely from a home office in our basement, and it was not unusual for her to go an entire work day without seeing another person between the time I left and the time I got home. She was starved for human interaction, and took a second job bartending a couple of times a week just for the social connection (the extra cash wasn’t half-bad either). Although she no longer pours beer and wine nor mixes the occasional Old Fashioned, more recently, I’ve noticed that a growing number of our kids’ friends and people in our little Pike and Rose enclave are picking up second jobs to help makes ends meet amid rampant inflation and slow wage growth. I don’t blame them for taking on these side hustles; over the years I’ve sat on several corporate boards and even taught a university night course to make extra money. In fact, according to one survey by LendingTree, 44% of Americans reported having a side job. But our nation’s Senators? According to the just released financial disclosures of U.S. lawmakers, a peek inside the bank accounts of our elected officials’ shows that a number of them supplement their salaries. Among the interesting highlights from the disclosures were:

  • Rick Scott (R-FL) is the richest senator, with a fortune in the hundreds of millions of dollars. Scott made his money at Columbia/HCA, the largest for-profit health care group in the U.S. He has airplanes worth between $25 million and $50 million.
  • Mitt Romney (R-UT) received $2,555,775 from a Goldman Sachs IRA last year; he also reported owning between $250,000 and $500,000 in physical gold bullion.
  • Richard Blumenthal (D-CT) reported income of more than $4 million.
  • Ted Budd (R-NC) made $375,630 from his ownership of ProShots, a retail sporting goods, indoor range, and training facility.
  • Tom Cotton (R-AR) made $373,537 from his book “Only the Strong: Reversing the Left’s Plot to Sabotage American Power.”
  • J.D. Vance (R-OH) earned $121,376 in royalties from his best-selling memoir, “Hillbilly Elegy.”
  • Tim Scott (R-SC), who is running for president, made $184,167 in royalties from HarperCollins.
  • Tommy Tuberville (R-AL) earned $1,750 in royalties from his appearance in the 2009 movie “The Blind Side.”
  • Raphael Warnock (D-GA) earned $655,005.57 from book royalties and $154,895 from the Ebenezer Baptist Church.
  • Ted Cruz (R-TX) reported a $500,000 advance for a book.

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

AEI Explains Why Industrial Policy Fails. Industrial policy is all the rage; President Biden has signed laws offering hundreds of billions of dollars for clean energy and semiconductor manufacturing. Similarly, former president Trump launched a trade war with China in the name of reviving U.S. industry. Democrats and Republicans alike seem to be on board with a shift from free markets toward government planning. But history shows industrial policy works better in theory than in practice. Real-world factors near always foil state efforts, and current policies raise the same old questions about industrial policy: (1) why would the government to do a better job than the market at picking winners and allocating resources; and (2) how will the government avoid mission creep, cronyism, and corruption? Practically, government planners lack the means to force industrial policy to succeed over the long term. Consider that although government can subsidize semiconductor manufacturing, it cannot create qualified workers out of thin air. Nor can policymakers prevent retaliation from competitors boosting their own favored industries. The Trump tariffs were a case in point—Federal Reserve economists found the U.S. suffered greater losses in manufacturing employment from retaliation than it gained from import protection. And because tariffs increased the cost of goods, shifting an industry from light to relatively heavy tariff exposure was associated with a 2.7% reduction in manufacturing employment. The Inflation Reduction Act (IRA) provides $370 billion in tax credits and incentives for clean-energy projects. Not surprisingly, South Korea and the EU have responded with subsidies of their own. Tit-for-tat industrial policies distort prices and reduce economic efficiency by prioritizing political whims over comparative advantage. What’s more, industrial policies fail because politicians can’t resist using public funds to advance unrelated goals. For example, the Biden administration requires semiconductor companies receiving federal funds to ensure childcare for workers. Add-ons such as this reduce the effectiveness of subsidies, lead to politically favored companies, and reduce market competition. This is not to say that industrial policy should never be used. Operation Warp Speed and the Defense Advanced Research Projects Agency (DARPA) are examples of the government successfully orienting a specific industry toward specific goals. What should be done instead? First, specific goods that genuinely warrant export and investment controls should be identified; second, public funds should be invested in basic research and infrastructure to increase productivity, wage growth, innovation, and dynamism; third, a carbon tax should be adopted to lower the relative price of green technology, allowing the market to determine the most promising technologies; and last, America should invest in all workers, rather than just manufacturing.

Observatory Group—Federal Reserve Rate Cut Redux. Current market pricing for a Fed rate cut in Q2 2024 is now a best case scenario. While this does not mean that a cut is far-fetched or remote, it does indicate that most of the risk is for rate cuts occurring later than Q2. Three factors would be necessary to start a genuine debate on rate cuts at the Fed. First, a long period of benign core consumer inflation—long being more than six months and benign being month-on-month measures averaging under 0.3% over that period; second, continued well-behaved inflation expectations; and third, evidence that the current degree of excess demand in the labor market has been reduced materially. This last factor would help build confidence among policymakers that the period of benign core inflation is sustainable. With those factors in place, the FOMC debate would move to the question: “is it appropriate for the ex-post real policy rate to be rising?” In our view, the answer would be no, and would open the door for the FOMC to cut rates gradually. Because this is not a scenario for rapid or large rate cuts, market pricing for approximately 100 bp in cuts next year is also close to best case. With the risk of a later start to cuts also comes the risk of fewer cuts before year-end 2024.          

U.S. Chamber Says Candidates, Right and Left, Should Butt Out of Business. As GOP presidential hopefuls geared up for the first primary debate, polling by the U.S. Chamber of Commerce argued that voters on both sides of the aisle are not interested in political “micromanagement” of business decisions. In fact, the Chamber says whether courting Republican, Democratic, or Independent voters, candidates would be best served to run as pro-business candidates focused on solutions that support jobs and the free enterprise system. In a matchup between hypothetical candidates—one who favors more disclosure of companies’ ESG efforts; one who favors government intervention to rescue companies from large “woke” investors; and one who says that whether it comes from the right or the left, government micromanaging of business is a bad idea—the last of those candidates received a plurality of support, including support from 53% of Republicans, 43% of Independents, and more than 25% of Democrats. Among the survey’s other findings were that voters across the ideological spectrum agreed that businesses are a force for good; that Republican and Independent voters trust large companies more than the federal government (Democrats rated the federal government as slightly more trustworthy); and more than 75% of Republicans and  60% of Independents favored less government intervention in the economy. The Chamber says the findings are a clear rebuttal to candidates who make political fights with corporations a central part of their campaign, including Republicans who lambast “woke” corporations.

“Off the Record”

Fasten Your Seat Belt and Return Your Tray Table to its Upright Position. For those predicting a soft landing for the U.S. economy, the runway may be getting close. While economists have grown more optimistic as inflation cools without doing dire damage to the labor market, those hoping the Federal Reserve will soon begin reversing its interest rate hikes are likely to be disappointed. Most D.C.-based analysts we’ve spoken to agree with the Observatory Group (see above) and predict the central bank will hold rates higher longer—well into 2024—to keep inflation at bay as consumers remain willing and able to spend as growth improves at a moderate pace. In fact, the Fed has indicated that more hikes could be coming if inflation stops slowing. The sunny economic state of affairs for the U.S. is the opposite of what China is experiencing. Confidence in the world’s second-largest economy is slumping as authorities step up efforts to bolster financial markets. Globally, the outlook is rosier. Experts expect the world economy to expand more than initially projected this year, echoing positive forecasts from the International Monetary Fund (IMF) and the World Bank. While the Fed may wish to pat itself on the back for reining in inflation, the dynamic is shifting—and the risk going forward isn’t doing too little, but doing too much. 

Can a Government Shutdown be Avoided? The House Freedom Caucus has unveiled its demands to avoid a government shutdown. The group of three dozen Republicans said it would oppose any stop-gap spending measure before the government runs short of money on Sept. 30 unless it includes more money for border enforcement, cuts to the Justice Department and FBI budgets, and a halt to “woke” Defense Department policies. Senate Majority Leader Schumer (D-N.Y.) and Minority Leader McConnell (R-Ky.) have previously said that a temporary spending measure, or continuing resolution (CR) would be needed to keep all federal agencies operating while lawmakers negotiate long-term spending bills.

In Other Words

“Setting up a competitive campaign, the infrastructure, the people, the systems in multi states, requires a tremendous amount of effort and time, and there are people who have laid that groundwork. I’m not one of them. Perhaps in the future. We’ll see about that,”

Rep. Phillips (D-MN) tamping down expectations that he might challenge President Biden.

Did You Know

Wednesday, Fox News hosted the first presidential debate of the 2024 campaign. Can you name which presidential campaign produced the first nationally televised debate? The first televised debate was not 1960—Kennedy v. Nixon; it occurred four years earlier, when Democratic candidate Stevenson challenged incumbent Republican president Eisenhower. However, those two men did not appear in the debate. Instead, on November 4, 1956, two surrogates debated the issues on network television: for the Democrats, former First Lady Eleanor Roosevelt; for the Republicans, the senior senator from Maine, Margaret Chase Smith.

Graph of the Week

Despite Passing on the Debate, Race Remains Trump’s to Lose. Former president Trump did not attend the first Republican primary debate, opting instead to sit for an interview with Tucker Carlson. Although long expected, the move reduced the salience of the debate by denying the field the opportunity to directly challenge the clear frontrunner. With a polling lead exceeding 40 points, and little to gain, the move made strategic sense for Trump as the overwhelming favorite in the race (75% odds). For Trump, a debate appearance would have risked creating the perception that he is an equal among candidates. At the same time, non-attendance reduced Trump’s exposure to attacks regarding legal issues, which are still his main liability in the race as they hurt his standing with moderate voters who do not want to vote for President Biden. It remains unclear whether Trump will attend future debates, likely participating only if challengers present a credible threat to his polling lead. Trump’s plan to turn himself in at the Fulton County Jail for arraignment the day after the GOP debate also deprived his opponents of additional airtime and kept his candidacy as the main storyline in the Republican race.

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