September 29, 2019
By Steve Stofka
Before I get into a historical perspective on this week’s goings on in Washington, let’s look at a troubling indicator in the latest consumer confidence survey. September’s survey from the Conference Board indicated a high negative gap between consumers’ expectations and their current conditions (Note #1). This gap is measured by subtracting consumer responses about their current conditions from their expectations of the near future. If I am doing well now but worried about my job in the next six months to a year, that loss of confidence in the future will show up as a negative gap between current conditions and expectations in the survey.
The level of negativity is higher than it was at the start of the recession in late-2007 or the latter part of 2001 when the tragedy of 9-11 occurred. Not only do poor expectations precede a recession, they help create that very recession in a self-fulfilling prophecy.
As the economy recovers from a recession, the gap reverses and turns positive; i.e. expectations are higher than current conditions. A person may be out of a job but some of their friends are finding work, so they expect to soon find work. The gap turned positive in 1990 after that recession, again in 2002 and in 2009.
Let’s turn to the events that dominated the news this week. An impeachment inquiry will certainly draw the attention of the White House from trade negotiations with China and may dampen any bullish sentiment in the stock market. What lessons can we learn from history?
A brief recap. In a July 25th, 2019 phone call with Ukrainian President Volodymyr Zelensky, President Trump asked him to investigate Joe Biden and his son in connection with a Ukrainian gas company. Joe Biden is a former Vice-President and potential Democratic presidential rival in the 2020 election. In an apparent cover-up, the record of the call was kept in a top-secret classified directory. A formal complaint filed by a whistleblower in early August was not acted on until a leak brought the whole affair to light. Is this an impeachable offense? You be the judge. Depends on which side of the political aisle you sit on.
There is an odd similarity between the presidency of Donald Trump and the first term of Bill Clinton’s presidency. Clinton’s first two years 1993-4 were punctuated with various financial and sexual scandals from his time as governor of Arkansas. The political arena is a shark tank, but the sharks don’t attack until they smell blood in the water.
Republicans attacked Clinton for his lack of character just as Democrats attack Trump now. Both men give good cause. If you’re a Democrat you’ll say, “Oh no, Clinton was nowhere as bad as Trump.” If you’re a Republican, you think the opposite. We can dispute the degree of shadiness, but both are shady dealers.
In 1994, after 40 years in the political desert, Republicans won control of the House in a sweeping change of voter sentiment. In 2018, Democrats did the same. In the 1996 election, Republicans put up Bob Dole against Clinton’s re-election campaign. Dole was a military veteran, a long-time member of the House and the majority leader in the Senate for a decade (Note #2). Character and experience can only take a candidate so far in the eyes of voters.
Until the candidacy of Donald Trump, Republicans touted the character of their presidential candidates. Trump flaunted his lack of character and his bloodthirsty negotiating skills. He bragged that if he got conservative judges appointed to the Supreme Court and the lower courts, he could shoot someone on 5th Avenue in NYC and Republicans would still vote for him. Oh, that Donald, partisans said. He sure is different. Trump was the big shark that could take on the corrupt Clintons. Republican voters understood that Trump was a NYC real estate boss who didn’t play by the rules. They were sick of Washington’s rules. They did not “send in the clowns,” the 16 candidates with much more experience and character than Trump. They voted for the shark.
Democrats still don’t get this. “Look at the big bad shark!” they shout as they point at Trump. Republican voters smile.
Trump said he would get judges appointed. He has. He said he would get tax cuts done. He has. Most of the cuts went to the top incomes. A $1 trillion annual subsidy to wealthy people. Republicans believe in trickle down economics. Farmers and others in rural America are waiting for that subsidy to trickle down.
Trump promised to bring jobs back to America. There are more jobs now but not in rural America where his constituency is strongest. Farmers and rural communities have been the chief losers in Trump’s fight against China.
In a recent Gallup Town Hall, Jeffrey Rosen pointed out that Donald Trump is part of an ongoing 4th Constitutional battle since the founding of our country (Note #3). Rosen is the president of the National Constitution Center, a non-partisan organization chartered by Congress to promote and educate the public about the Constitution.
Beginning in the 1980s, Republicans have tried to undo the radical changes to the meaning of the Constitution instituted by FDR. In 1936-37 he threatened to pack the court if they did not approve his New Deal programs. Key members of the court reversed their earlier opinions and found greater powers for the Federal government in the Commerce and general welfare clauses of the Constitution.
In 1987, Democrats in the Senate blocked the appointment of Robert Bork to the Supreme Court. That appointment would have shifted the weight of opinion on the court toward those justices who preferred a more temperate role for the Federal government as understood by courts before the FDR administration and the Great Depression.
In the past eighty years, Congress has largely abdicated their lawmaking responsibilities to executive agencies whose career employees develop thousands of rules that citizens and companies are expected to follow. This type of rulemaking creates a gap in the checks and balances originally built into the Constitution.
Has Congress delegated too much administrative power to the President? Since President Trump was elected, Democrats have become aware of the dangers of a country run by executive order and rule making agencies. FDR’s cabinet was 6 people. Now it is 23 people under whom millions of people work for the executive branch (Note #5). Is it too big, too ungovernable? Many think so.
Financial regulators stumbled over themselves and failed to understand, report on or curtail the risks that the banks and investment companies were assuming before the financial crisis. The rollout of the health care exchanges under Obamacare was an embarrassment of mismanagement and poor execution. There are numerous other examples of poor agency management and overreach but that’s the subject for another time.
If you think the job of the federal government is to fix things, you will be disappointed over the course of the next year. Congress will accomplish little legislation. If you prefer a minimalist role for the federal government, you are probably thrilled with this prospect. Remember, though, that while you sleep, federal agencies are promulgating new rules and new penalties for non-compliance.
Almost half of the voters in this country wanted Donald Trump to break things in Washington. He is doing a good job of that so far. If consumer expectations were dropping before this week’s events, they will only be dampened further as the controversies in Washington continue. Already on the decline, investment spending will contract as companies put plans on hold while politicians in Washington play the blame game.
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Notes:
1. The Conference Board. (2019, September 24). Consumer Confidence Survey. [Web page] Retrieved from https://www.conference-board.org/data/consumerconfidence.cfm
2. Wikipedia. (n.d.). Bob Dole. [Web page]. Retrieved from https://en.wikipedia.org/wiki/Bob_Dole
3. National Constitution Center. (2019, September 25). The Battle for the Constitution. [Web page, audiocast]. Retrieved from https://constitutioncenter.org/debate/past-programs/the-battle-for-the-constitution. An overview of the four constitutional battles is from approximately 30:00 to 45:00 in the podcast.
4. Wikipedia. (n.d.). Robert Bork. [Web page]. Retrieved from https://en.wikipedia.org/wiki/Robert_Bork
5. Wikipedia. (n.d.). Cabinet of the United States. [Web page]. Retrieved from https://en.wikipedia.org/wiki/Cabinet_of_the_United_States
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