September 15, 2023

Thought of the Week

Dating back to the early 19th century, and based on the idea that there are two wheels on a bicycle, the idiom being “a third wheel” is used to indicate situations when someone would be a burden, unnecessary, and/or an unwelcomed member of a group. The saying is commonly used in situations when there is one couple, and a third person, or “third wheel,” would be the odd person out by not fitting in. U.S. politics is dominated by the two-party system, and at times, each party, Republican and Democrat, has viewed third-party presidential candidates as “third wheels.” Republicans viewed Ross Perot and his Reform Party as a “third wheel” in 1992, while Democrats saw Jill Stein and her Green Party as a “third wheel” in 2016. Each party believes that the “third wheel” in the election may have cost their preferred candidate the White House. So, it’s no mystery why many Democrats, and some Republicans, view a possible No Labels candidate as a “third wheel.” On a recent Observatory Group conference call, we had the opportunity to participate in an open discussion with No Labels Founder Nancy Jacobson. No Labels sees themselves as quenching the U.S.’s thirst for bipartisanship, and they believe 2024, with two extremely unpopular major party candidates, could produce just the “Black Swan” moment necessary for a third-party winner. According to No Labels, 63% of likely voters are open to a moderate third-party candidate when the two major party candidates are President Biden and former president Trump. Acknowledging that the public neither wants a Biden nor Trump second term, No Labels believes they can give voters a viable choice. Among the names being mentioned openly as possible No Labels candidates for president and/or vice president are Senator Joe Manchin (D-WV), former Congresswoman Tulsi Gabbard (D-HI), former Maryland Governor Larry Hogan (R), and former Utah Governor Jon Huntsman (R). While No Labels is still deliberating on how the ticket will technically be formed, the party says that they will not choose candidates using polls, and will wait until after Super Tuesday before deciding whether to run their own candidates. If at that time, it still remains a Biden-Trump race, it is likely that No Labels will run a unity ticket with a Republican on the top and a Democrat in the VP slot. In addition, No Labels says that if its ticket is not able to reach 36-37% in states that add up to 270 Electoral Votes, then they will terminate the project. No Labels pushes back very hard on being tagged as a spoiler that will hand the White House to former President Trump. They see their unity ticket as pulling voters equally, if not more, from Trump than Biden. What’s more, outside of Maine and Nebraska, all of the state ballots are winner-take-all elections, meaning that in such a split electorate as little as a 34% plurality could garner a state’s Electoral Votes, which is a huge drop-off from the 63% who are open to an alternative candidate. By being entirely transparent, No Labels believes they can build trust with the public and alter the trajectory where no party speaks for the center. If the event they do win the election, by providing the necessary political cover that would flow from leadership, No Labels sees a pathway for doing bipartisan work with members of Congress.

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

American Enterprise Institute (AEI) Says Trump’s Trade War was a Loser. Former president Trump boasts that his protectionist policies were successful. However, the data shows otherwise. While Mr. Trump’s tax cuts and regulatory relief rejuvenated the economy, his protectionist policies stunted the ensuing expansion. Growth accelerated from 1.7% in 2016 to 2.2% in 2017 and then to 3% in 2018, a 13-year high. By 2019, the first full year Mr. Trump’s tariffs were in effect, the growth rate had fallen to 2.3%, a decline in sync with Congressional Budget Office and Federal Reserve estimates of the potential negative effects of the Trump administration’s protectionist policies. Mr. Trump’s trade war began in July 2018, with tariffs on steel and aluminum. By raising prices on these metals, the tariffs destroyed far more jobs than they created. Overall, manufacturing employment fell in each of 2019’s four quarters and the first quarter of 2020, leaving the pre-pandemic level of manufacturing employment lower than when Mr. Trump took office. Higher costs for steel, aluminum, and Chinese components produced by the tariffs, and combined with foreign retaliation, reduced the demand for U.S. exports. As a result, the annual rate of growth in manufacturing fell. By the first quarter of 2019 it reached a post-Great Recession low of negative 5.3%. Manufacturing output growth continued to fall until its post-lockdown bump in the second half of 2020. Under protectionist Trump policy, total manufacturing output was 2% lower by the start of the pandemic than it was when he raised tariffs. The protectionist policies also failed to deliver reductions in the trade deficit. By reducing demand for foreign goods, tariffs and quotas reduced the supply of U.S. dollars in world currency markets, raised the value of the dollar, and made American exports less attractive.  Protectionism didn’t create jobs, and the nation was made poorer as prices rose and the economy became less efficient. Jobs were simply transferred from the most efficient, most competitive sectors to industries where that were less efficient and competitive. As a result, economic growth declined.

Eurasia Group Sees Immigration Emerging as a Wedge Issue Among Democrats. An escalating dispute between elected officials in New York and the Biden administration over immigration is reflective of a split within the Democratic Party over immigration policy. As mayors and voters in blue cities protest the arrival of tens of thousands of migrants, fissures in the party have created a dilemma for Biden similar to the one faced by his Democratic predecessor, Barack Obama. Black Democrats have considerably less expansive preferences over immigration than do white Democrats, making the issue a hard one for Democrats to navigate, especially in blue cities like New York, where Black voters, college-educated whites, and Hispanic voters are the three major pillars of the Democratic coalition. In the coming months, Biden will face increased pressure from state and local Democrats to offer federal solutions, including an expedited process for work authorization for migrants and federal aid to fill budget gaps that are sure to arise in municipal budgets due to the costs of housing migrants. Without a substantial decrease in arrivals at the southern border, however, there is little the White House can do quickly to alleviate the burden on blue cities. The issue is likely to simmer, and cause tension, within the Democratic coalition through the 2024 election, creating opportunities for Republicans to make inroads with parts of the Democratic base who want to see Biden do more.

National Association of Manufacturers (NAM) Sees Consumer Prices Rise Most in 14 Months. In August, inflation made its biggest monthly jump since January, according to the Department of Labor. The consumer price index, which measures costs across a broad variety of goods and services, rose a seasonally adjusted 0.6% for the month, and was up 3.7% from a year ago; economists had been looking for respective increases of 0.6% and 3.6%. Excluding food and energy prices, which can be highly volatile from month to month, core CPI rose a more moderate 0.3%; the Federal Reserve focuses more on core CPI, which offers a better long-term look at inflation’s direction. As noted, energy prices accounted for most of the rise, increasing 5.6% on the month (including a 10.6% rise in gasoline prices). Food costs increased 0.2%, while shelter, which constitutes approximately one-third of the CPI weighting, rose 0.3%. The jump in headline inflation hit worker paychecks. Real average hourly earnings declined 0.5% for the month, although they were still up 0.5% from a year ago. So, what does this all mean? The August CPI report is unlikely to change the Fed’s apparent decision to skip a rate hike at its meeting on Sept. 19–20, but it may mean there is potential for another rate increase in the next few months. Over the past 17 months, in an effort to combat inflation, the central bank has increased its benchmark borrowing rate by 5.25 points.

“Off the Record”

Speaker McCarthy’s Impeachment Play Displays the Weakness of His Majority. Speaker McCarthy’s decision to greenlight an impeachment inquiry without a House vote neatly encapsulates the challenges Republicans have living with their slim majority. The Speaker OK’d the inquiry after endless chatter from the far right, with hardline conservatives accusing him of dragging his feet on holding President Biden “accountable.” Without their backing, McCarthy doesn’t have the speakership or the House majority, and even today, some conservatives openly toy with throwing McCarthy out of the speakership. At the same time, McCarthy’s decision to bypass a recorded vote, something he criticized then Speaker Pelosi for in 2019, was designed to protect moderate Republicans from having to publicly cast a tricky vote that could come back to haunt them in 2024. The reality is that once an inquiry is opened, it’s almost guaranteed that that it will lead to impeachment because once the House has begun the process, not impeaching would look like a validation of the president. Interestingly, of the 18 Republicans who represent districts that Biden won in 2020, the majority said they support the inquiry. These moderates say the fact-finding mission is an appropriate step in investigating Biden. Conversely, many hardliners weren’t impressed. There was speculation that the timing of McCarthy’s announcement was intended to distract from the separate FY2024 spending battle. Conservatives bristled at the idea that McCarthy’s support for an impeachment inquiry would make them more likely to support a short-term funding bill designed to avoid a government shutdown, despite spending the August recess pushing for just such a deal.

In Other Words

“I rise today to serve notice. Mr. Speaker, you are out of compliance with the agreement that allowed you to assume this role. The path forward for the House of Representatives is to either bring you into immediate total compliance or remove you, pursuant to a motion to vacate the chair,” Rep. Gaetz (R-FL) in response to Speaker McCarthy’s impeachment inquiry into President Biden

“Go ahead. I’m not f—king scared of it. Any new speaker will do what I’m doing…If you think you scare me because you want to [vote to boot me], move the f—king motion,” House Speaker McCarthy (R-CA) in a closed-door meeting of House Republicans on the prospect of being ousted by the House Freedom Caucus for bringing a CR or other spending measure to the floor.

Did You Know

This Cycle Could be the Most Expensive Election Ever. Campaign advertising could top more than $10.2 billion this cycle, a record sum that would outpace the $9 billion spent four years ago, according to estimates from AdImpact. More than $2.7 billion is expected to be spent on the presidential election, $2.1 billion on Senate races, $1.7 billion on House races, another $361 million on gubernatorial races, and $3.3 billion on other down-ballot issues and candidates. Nearly half of the $10.2 billion projection is expected to be spent on broadcast; traditional TV remains the most efficient messaging medium for campaigns.

Graph of the Week

August Inflation Signals a Political Challenge for the White House. August inflation came in at 3.7%, above expectations, with much of the increase due to a spike in gas prices. Stubbornly high inflation is bad news for Democrats, whose prospects in the 2024 presidential election will depend in large part on whether inflation comes down significantly by next November. Although the labor market remains strong, President Biden’s handling of the economy is underwater, and in line with his overall approval rating. At present, the public associates “Bidenomics” with inflation and taxes, and next year is riddled with economic challenges for the administration, including the resumption of student loan payments, the likelihood of tighter oil markets, and the prospect of a recession as the Fed maintains restrictive policies. Because the economy will be a policy issue in 2024, the Eurasia Group believes it will be a challenge for Biden’s reelection prospects.


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