February 9, 2024

Thought of the Week:

Have you ever wondered where expressions like “Bite the Bullet,” “Mad as a Hatter,” or “Waiting for the Other Shoe to Drop” originate? Before anesthesia, surgery patients were given two things to deal with the coming pain—a shot of whiskey and a bullet to bite down on. Hence the expression “bite the bullet” to accept something difficult or unpleasant. To be “mad as a hatter,” meaning crazy or unpredictable, comes from the18th century hat making industry where prolonged exposure to the mercury used to turn fur into felt caused employees to develop a range of mental ailments. “Waiting for the other shoe to drop” comes from late 19th and early 20th century New York City apartments built with bedrooms on top of one another. It became commonplace to hear an upstairs neighbor take one shoe off, drop it, then repeat the action. The phrase became shorthand for anxiously anticipating the inevitable to happen. For at least the past four months the Biden administration has been left wondering why improving economic news hasn’t caught on with voters. Consider that real GDP increased at a healthy annual rate of 3.3% in the fourth quarter of 2023; inflation is currently running at just 3.4%, down from a 40-year high of over 9% earlier in President Biden’s term; the latest jobs report points not just to low unemployment but a hiring surge; and consumer confidence is at its highest reading in more than two years. The seeming disconnect between statistics and voter perception is important in an election year, where the economy will be one of the primary factors the ballot will turn on. In fact, the latest NBC News poll shows former president Trump leading President Biden by an astounding 23 points on the question of which candidate would better handle the economy. The explanations I’ve heard in, and around, Washington range from: there’s a time lag, positive results take a while to filter through the macroeconomic system to poor messaging around the “Bidenomics” label to biased news sources where people only consume the news that feeds their prejudices to a wide series of non-economic concerns such as war in the Middle East, crime, and even loneliness. But as I’ve been telling various groups going back to last September’s Credit Manager’s Meeting, the reason is really very simple. A basket of groceries that cost $100 when President Biden first took office now costs more than $125, and Congress’ Joint Economic Committee found that in Washington, D.C., for example, families need to spend an additional $17,109 annually just to keep up with where they were at the beginning of 2021 (most American households need to spend an additional $10,000 or more just to afford the same goods and quality of life they had less than three years ago). Although wages may be improving, they’re not improving by that much. BOOM! That was the sound of the first shoe dropping. Sure, people are spending on dinners, vacations, and filling their Amazon Prime shopping carts. But there’s an uneasiness to it—at a quick rate, U.S. consumers are depleting the excess savings they built up during the pandemic, and credit card debt now stands at an all-time high of $1.1 trillion. Add to that estimates that the federal debt will reach a record 116% of GDP and deficits will reach $2.6 trillion by 2034, interest costs will double to $1.3 trillion by 2031 and hit 3.9% of GDP by 2034, and that major trust funds for Social Security, Medicare, and highways are quickly approaching insolvency. Unless you’re living in the Penthouse, you’re now waiting for that other shoe to drop. BOOM!

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

Eurasia Group Says Trump 2.0 would Turn the Transatlantic Alliance into a Transactional Relationship. A return to the White House by Donald Trump, with few political and material constraints on extreme policy shifts, would not lead to a complete U.S. withdrawal from Europe but would turn the transatlantic security partnership into a largely transactional affair (a 65% probability), creating uncertainty among EU allies. Although a President Trump would keep key military assets in Europe, he would leverage accusations of European free-riding and unfair trade practices to set ambitious deadlines to meet American demands on defense spending and trade in return for keeping Article 5, NATO’s mutual defense clause, alive. Because most Republicans still favor NATO, they would limit the extent of any ultimate pullback. With no easy replacement for U.S. security backing, the Western security framework could weaken with long-lasting effects—military tensions, instability, and conflict outside of NATO. In the base case, Russia would probe American and European responses, ramp up covert operations, increase disruptive cyberattacks, and expand information operations in Western media. Russia would also beef up military assets along the border of NATO states. A scenario in which Trump 2.0 largely resembles his first term in office and barks but does not bite (20%), and a worst-case scenario in which Trump abandons U.S. security guarantees and removes major military assets from Europe (15%) are less likely but must be considered.

National Bureau of Economic Research Finds that Trump’s ‘Trade War’ was ‘at Best a Wash’ for Jobs, but Good for the GOP. The “trade war” initiated by former President Trump delivered political dividends for the Republican party but did not bring back promised jobs in regions harmed by trade with China, a new study from the National Bureau of Economic Research finds. The paper analyzed whether President Trump’s trade policies, including tariffs and other measures, achieved stated and unstated goals to: (1) bring back jobs to the U.S.; and/or (2) build political support for Trump and the Republican party. While the administration failed on the former count, the survey concluded it succeeded on the latter. Results show that the trade-war did not provide economic help to the U.S. heartland, nor did it raise U.S. employment in protected sectors. In fact, retaliatory tariffs imposed by China and others “had clear negative employment impacts, primarily in agriculture; and these harms were only partly mitigated by compensatory U.S. agricultural subsidies.” Nevertheless, the tariff war was a political success for the Republican party, with residents of regions most exposed to import tariffs becoming “less likely to identify as Democrats, more likely to vote to reelect Donald Trump in 2020, and more likely to elect Republicans to Congress.” The former president is again making trade a key plank of his campaign, going so far to say that if elected he would consider raising tariffs on Chinese goods to 60% or higher. Former USTR Lighthizer, the architect of Trump’s trade policies during his presidency, is advising the candidate. The study’s conclusion offered an explanation for the mismatch between the tariffs’ few tangible benefits for workers but wider political benefits for the GOP, saying that voters valued Trump’s willingness to confront China and support American jobs—even if the policies did not deliver on the goal.

Trade Analyst Laura Chasen Reports that Nippon Steel’s Bid has Become Politicized Just as the CFIUS Review Begins. This week, Nippon Steel submitted a CFIUS request asking for review of its proposed takeover of U.S. Steel. Although CFIUS is supposed to report on its investigation within 90 days of the filing, and the President is supposed to announce his decision 15 days after that, the timing of the entire process remains unclear. Because timing in complex cases can slip, some now speculate that CFIUS won’t report its results until after the November election to avoid having its decision become a campaign issue. Although the clock on the President’s decision has started, the final decision could come down to who wins the election. In one nightmare scenario, Biden loses, CFIUS reports right after the election that the takeover can proceed, Biden approves it, but then the new President, presumably GOP candidate Trump, rejects it. Given the expansive authority a president has over all matters pertaining to national security, it remains unclear whether this is a possibility. The U.S. remains the global leader in foreign direct investment, and any government action making clear that even companies from allied countries aren’t welcome as investors would be economically damaging. Moreover, other countries might follow the U.S. lead and begin blocking American FDI. In the scenario positing that Trump wins the election, such considerations may not stop him; blocking a foreign takeover would be in line with other nationalist/protectionist policies, such as high tariffs on imports and WTO withdrawal, he promises to implement. 

“Off the Record”

Just 38% of Republicans on K Street think Mike Johnson (R-LA) is an effective House speaker. The results from Punchbowl News’ latest survey are not surprising (the Washington office participates in the survey). Throughout his 100-plus days as speaker, Johnson has struggled with how to move major pieces of legislation, even with key deadlines looming. Although the odds were stacked against Johnson when he became speaker—he inherited a fractured GOP conference with an unruly right flank that had just ousted his predecessor—what’s even worse now is that the House GOP has been losing members to its already razor-thin majority. Several House Republicans have left—including former Reps. McCarthy (R-CA) and Santos (R-NY). In addition, House Majority Leader Scalise (R-LA) has been absent for weeks after receiving a stem cell transplant, which leaves Johnson with no room to maneuver on votes. Even with the hiccups, K Street thinks Johnson’s job is safe. Most GOP K Street leaders (68%) say they don’t think Johnson will be ousted.

In Other Words

“The U.S. federal government’s on an unsustainable fiscal path. And that just means that the debt is growing faster than the economy. So, it is unsustainable. I don’t think that’s at all controversial,” Fed Chair Powell on the long-term fiscal picture, which is unlikely to improve regardless of the 2024 election outcome.  

“The broader situation is that the economy is strong, the labor market is strong, and inflation is coming down. My colleagues and I are trying to pick the right point at which to begin to dial back our restrictive policy stance. That time is coming,” Federal Reserve Chair Powell.

Did You Know

In the early years of the United States, the president’s wife was commonly referred to as the “presidentress.” The term “First Lady” was first used in 1849 by Zachary Taylor, the twelfth president, to eulogize Dolley Madison, the widow of the fourth president. The title eventually grew to encompass all presidential wives.

Graph of the Week

The Conference Board’s January Consumer Confidence Index improved to its highest reading since December 2021, and marked its third straight monthly increase. After a year of consumer pessimism at odds with stronger macroeconomic data, January’s brighter mood reflected three trends: slower inflation, anticipation of lower interest rates, and generally favorable employment conditions. While rising prices remain a concern, inflation expectations are at a three-year low. Although Federal Reserve rate cuts are unlikely at the March meeting, expectations are now for a first cut in June 2024.

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