The Positives That Drove the U.S. Economy Are at Risk
(Bloomberg Opinion) -- For the past few decades, the U.S. economy has benefited from more immigration, more trade, lower taxes and increased domestic oil production, especially because of fracking. These trends coincided with declining inflation and favorable conditions for consumers, investors and companies (although a downside was rising inequality and stagnant wages for workers). I like to refer to these as positive supply shocks — some of them the result of policy choices, some the result of random events.
The election of President Donald Trump suggested that a reversal of many of those trends was in the making, with negative supply shocks more likely given his views on trade and immigration. Now it looks like 2019 is shaping up as the year the reversals are starting to become visible — at least in the random-event department. During the past week, the attack on Saudi Arabia's oil facilities knocked millions of barrels of production offline, and a nationwide strike by the United Auto Workers has temporarily halted production of General Motors vehicles.
More broadly, the political backdrop that produced decades of positive supply shocks was one where both parties generally favored less regulation of markets and more globalization. The expansion of immigration after the Immigration and Nationalization Act of 1965 increased the productive capacity of the U.S. and ensured that businesses rarely faced labor shortages. Increased trade served two purposes: It gave U.S. consumers access to cheap imported goods, which helped hold down inflation, and it opened foreign markets to goods produced by American companies, increasing their profits. Lower taxes were in part a response to a perceived capital shortage during the high inflation of the 1970s and stimulated investment and hence economic growth. In more recent years, fracking benefited oil-producing communities while also making the U.S. less vulnerable to sudden, sharp reductions in the oil supply, as we just saw in Saudi Arabia.
But as partisan polarization has intensified, particularly in the aftermath of the Great Recession, the old consensus has broken down, with each party prioritizing issues that lead them to accept the impact of negative supply shocks in pursuit of policy goals.
As Trump has shifted the Republican Party's base toward rural and post-industrial white voters, trade and immigration have fallen out of favor. Although xenophobia is part of it, the economic rationale is that by cutting immigration and reducing imports via higher tariffs, domestic sources of production will take up the slack. Rather than companies hiring immigrants, they'll hire Americans instead. If labor shortages arise, companies will have to raise wages and work harder to find employees; with the U.S. labor force participation rate lower than it's been in the past, and lower than it is in other countries, this might lead to more hiring of workers who have dropped out of the labor force.
Trade is similar — importing less from foreign manufacturers, in theory, means buying more from domestic companies. To the extent domestic producers don't exist, it creates incentives for business formation. This should lead to more investment, hiring and ultimately economic growth. But the result could also be just the opposite.
As we're seeing on the campaign trail, Democrats have their own priorities that could lead to negative supply shocks. Climate change has become a signature issue for Democrats, and it's not unreasonable to expect Democrats to fight a war on carbon in the 2020s. Earlier this month, Massachusetts Senator Elizabeth Warren said that on her first day as president, she would ban fracking. Ambitious policy proposals like the Green New Deal would seek to transition the U.S. away from carbon-based energy sources as soon as possible.
Leading Democrats also see unions and increased labor activism as an important tool to fight for workers' fair share of economic output versus their employers. Warren, Vermont Senator Bernie Sanders and former Vice President Joe Biden have all given public pledges of support to the striking UAW workers. The next Democratic president might not have the votes in the Senate to enact parts of their labor and income-inequality agenda, but they could see encouraging strikes as one way to achieve the same goals outside of the legislative process. This could mean disruptions to production and supply shortages of the kind that Americans haven't seen in decades.
It remains to be seen how successful the parties will be in pursuing these policies and what kind of economic pain it would take for them to change course or for the public to turn against them. But it is political risks like these will be the biggest headwinds for the economy in the near future.
This column does not necessarily reflect the opinion of the editorial board or Bloomberg LP and its owners.
Conor Sen is a Bloomberg Opinion columnist. He is a portfolio manager for New River Investments in Atlanta and has been a contributor to the Atlantic and Business Insider.
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