May 28, 2019
Craig Holke, Investment Strategy Analyst
Campaigns, China, and Consensus On Infrastructure?
In June, the 2020 election season will begin in earnest, with the first Democratic debate taking place. The debate will give voters the chance to hear the top candidates and assess their positions on key economic and market-impacting events.
- Campaign promises may or may not become policy. However, the cost of Medicare for All and the Green New Deal are concerning, even in a $20 trillion economy. Such large increases in government spending may result in a crowding-out effect, with the government borrowing more, driving up rates, and preventing private investment that may otherwise have occurred.
- Although it is unlikely to be passed while Republicans maintain control of the Senate, we believe that a Medicare for All system would be negative for the Health Care sector—due to elimination of the private insurance industry and likely lower negotiated product and service prices. Depending on implementation, the Green New Deal may be positive for Industrials and Materials. It would be negative for the Energy sector and could drive utility and transportation costs higher.
- Higher taxes likely would be insufficient to cover the costs of these programs, resulting in increased federal deficits and debt. Equity markets could suffer as revenue prospects decline.
Meet the leading Democratic candidates
Believe it or not, the 2020 presidential election is about to kick into high gear. There are currently 24 Democrats that have either formally declared their candidacy or have formed exploratory committees to run.1 The first Democratic debate will take place in June. Politics always has been a rough game. A question for investors to consider is whether the Democrats can settle quickly on a likely nominee.
Former Vice President Joe Biden led polls even before he officially entered the race on April 25, 2019. Since that time, his lead has increased, and he now ranks first in the polls with roughly 40% of the vote.2 Most of this gain has come at the expense of Senator Bernie Sanders. The ranking has remained fairly steady, with Joe Biden leading, followed by Senator Bernie Sanders, Senator Elizabeth Warren, and former Senator Kamala Harris. While platforms are not finalized, there are several policy areas that may have direct effects on the economy and investors’ portfolios. Table 1 lists the most consistently ranked top candidates and their positions on key policies.
Let’s examine the costs of the economically and market-impacting plans in ascending order. Keep in mind, none of these “free” plans comes without cost. All of them likely would be funded through a combination of higher taxes and/or increased public debt.
- Senator Sanders proposed a College for All bill during the 2016 election cycle. His estimate at that time was a cost of $47 billion annually to provide money to states for the elimination of tuition.4 States still would be responsible for funding the additional $23 billion needed each year. This is not a significant amount as federal budgets go, but it is important to remember that the 2018 deficit already was $779 billion.
- As we mentioned in last month’s report, the estimated cost of the proposed Medicare for All plan is roughly $2.5-$3.5 trillion a year.5 That is roughly two to three times what the federal government currently spends on major health care programs ($1.2 trillion in 2018 for Medicare, Medicaid, etc.); four to six times what is spent annually on the entire U.S. military ($627 billion in 2018); and potentially larger than the $3.3 trillion in federal government revenues for 2018.
- The Green New Deal proposes to address climate change by having the U.S. economy switch to 100% renewable energy within 10 years. So far, the proposal is not specific about which energy sources would be phased out and on what timeline. However, some work has been done that would place the cost over the next 10 years at a level between $5 and 9 trillion per year.6 To put that into perspective, on an annual basis, that is higher than the entire federal government outlay of $4.1 trillion and roughly 25-45% of the 2018 economy’s total output of $20.8 trillion.
Campaigning is a tough job, and not all promises eventually turn into policy. Voters will decide the future of programs such as these by determining their candidate and eventually choosing the next president. Many thought that the U.S. would never have the federal government play such a large role in the health care system as it now does (until the Affordable Care Act was signed into law in 2010). While the price tags of some of these options do not seem to be feasible, a political sweep of the presidency and both chambers of Congress could leave the door open to these programs.