“There are two things that are important in politics. One is money, and I can’t remember what the other one is”
– Senator Mark Hannah
The American election approaches. In a few months, the candidates for the Republican and Democratic parties will be chosen. For those unaware, although American and Australian elections are both democratic processes, there are some stark differences between the two. In Australia, the public vote for who they want to lead their electorate. The party with the most candidates becomes the ruling party, and the members within that party choose who will lead their party, and thus the country. Contrastingly, in America, the public elect who they want to represent their party, and subsequently the public vote for which candidate they prefer, with the possibility of electing an independent as president. With this process progressing to its culmination, significant questions still remain; will Donald trump Cruz? Will Hilary Clinton beat Bernie Sanders? And more importantly, what will be the political, social and economic impact of these decisions?
The response of markets
As the world’s largest and most outrageous election machine continues to turn its wheels every four years, the first thing to consider is the impact on the markets themselves, which naturally responds to the prospect of a new commander-in-chief. While one may be inclined to assume that agents will react based upon specific policy proposals of leading candidates, in reality the market is far more impacted by the innate volatility of an election period.
Data collected by Merril Lynch concerning election years, dating back to 1928, supports this claim. When a sitting president has run for re-election – therefore generally leading to a more predictable result – the S&P500 index has averaged annual gains of 12.6% (“How Presidential Elections Affect The Markets”). However, in years when neither candidate has been an incumbent, thereby introducing a greater variability into the system, the index has averaged a fall of 2.8%. While markets obviously react to a wide range of factors, the correlation between election scenarios and market movements is significant and strengthens the claim that the predictability of an election will ultimately have the greatest effect upon the market.
There is more evidence to suggest that agents ignore the nature of the candidates and their policies. While Republican front-runners have traditionally touted Reaganomics, trickle down tax systems, and the efficiency of the free market, there is no evidence that markets in general have benefited from Republicans in the Oval Office. Since 1900 the Dow Jones has grown an average of 9% in years under Democrat terms, while only 6% when office has been held by the opposing party (Kates Smith). Indeed, Ross Koestrich, one of the chief strategists for BlackRock, has been quoted as saying “over the past century, which party occupies the White House has had no discernible or consistent impact upon US equity markets” (Foster). Politics is a fickle game. Candidates come and go, and even if elected their policies may completely change. From the data, it appears that markets have a firm grasp of this idea, and are certainly focused upon the unpredictability of an election cycle rather than the result.
The long-term economic impacts
That’s not to say the specific policies of parties do little to influence the economy – although the markets may understand the generic volatility involved and grow similarly no matter the party, the economy itself has had differing results.
Historically, the Democratic party has leaned towards greater governmental intervention and industry-wide regulation whereas the Republican party has subscribed to a more laissez-faire approach of economic governance (Ryan C. Fuhrmann, 2012). In light of the current bearish economy, the proposed budgetary policies of individual candidates are unsurprisingly one of the main focuses of the 2016 presidential debates (Gallup, 2016) and the general trend seems to have held. Amongst the candidates, the Republican members are in unanimous agreement for steep tax cuts as well as a decrease in federal spending. Conversely, the two Democratic candidates, Clinton and Sanders, have taken the opposite stance, opting instead to address the flagging economy via an increased tax burden on the wealthier demographic (Patrick O’Connor, 2016). Given its role as a major source of government revenue, the impact of changes to taxation on America’s federal reserves is immense. In an analysis conducted by the Tax Policy Centre, Republican frontrunner Donald Trump’s tax plan is projected to increase federal deficits by US$9.5 trillion within the decade, an exponential increase from the current 2016 figure of US$544 billion. On the other hand, the Democratic party’s presumptive nominee Hillary Clinton is expected to offset the federal deficit by US$1.2 trillion (Cole, 2016) where, echoing the anti-plutocratic sentiments of the proposed Buffet Tax in 2012, Clinton aims to redistribute part of the wealth to lower income groups. In this regard, voting preference would seem to be a clear cut choice depending on one’s economic standing.
This startling trend is attributed instead to increases in total factor productivity and mere coincidence. The Economist also points out the importance of good judgment, political standing notwithstanding. For instance, Bill Clinton’s 1993 budget cuts set a precedent in decreasing the federal deficit by US$500 billion (Rabin, 2003) and, coupled with a series of timely governmental outlays, managed to heighten the 1990s U.S. economic boom. In the opposite context, Bush’s inaction regarding the growing housing bubble during his tenure may very well have exacerbated the subprime mortgage crisis in 2008. Simply, a plan’s execution is much more important than the approach taken and America’s sluggish economy falls in just as good (or bad) hands under either party.
The dirty, dirty campaign money
Instead of looking towards monetary benefits generated by the election, perhaps more salient is the amount spent on each election process with America’s spending starkly different to Australia’s election process. The Australian Electoral Commission (AEC) reported a total spending of approximately AUD$51million on party campaigning for the 2010 federal election (AEC, 2011). This funding, although ostensibly large, only culminates in a spending of $2.31 per vote (AEC, 2011). In contrast, America spends astronomical amounts. During the 2012 electoral campaign season, American donors spent $2.6 billion (AUD$3.46 billion), totalling almost AUD$27 per voter, according to the Federal Election Commission. This is more than ten times Australia’s spending per voter. For the upcoming party elections, an astounding total of $925.7million (AUD$1.23 billion) and counting has been raised (“Which Political Candidates Are Winning the Money Race”, 2016). The elections have barely started. Jeb Bush alone raised $157.6 million (AUD$209.78 million), that is around 10 times the total spending of the entire Liberal Party campaign in 2010, and Jeb is no longer even in the electoral race!
What is the reason for the large disparity in the American spending compared to the Australian spending?
One key element is the emphasis of television advertising in the US elections and the cost of such campaigning in America (Hornick, 2011). But perhaps a more concerning reason is that America, in contrast to other countries, attracts significantly sized donations from a small group of donors. This is done mainly through a super political action committee – a funding mechanism which allows large businesses to donate unlimited amounts to campaigns, as long as they are disclosed (Fasman, 2016). Charles and David Koch, part of America’s second wealthiest family who earned their fortunes in the crude oil business have revealed their intent to donate approximately $900 million in this year’s election (Confessore, 2015). This is worrying; when private institutions contribute substantial sums of money to ‘independent’ political leaders, the phrase “conflict of interest” indeed comes to mind – former US political reporter Theodore White thirty years ago proclaimed that “the flood of money that gushes into politics today is a pollution of democracy”. This virus of the US political system has not only lingered, but permeated the legal boundaries that once at least contained the situation, creating negative externalities on all American citizens.
Let’s break apart this self-propelling cycle of plutocracy: Big business and wealthy philanthropic families kindly donate prodigiously large sums of cash to the candidate that they feel will see ‘eye to eye’ on their political ideals. Just like that the top end of town has just been elected into political office. The wealthiest of businesses and philanthropists can then literally write the policies that profit them self, often at the expense of the helpless average US citizen, and pressure their purchased elected candidates to vote in favour of their proposed bill like a sadistic puppeteer (Represent.us).
The current presidential campaign – still a year out from elections – has seen almost US$900 million raised by candidates (opensecrets.org), with projections of a US$10 billion blowout on donor funds. As expected, over half of donated funds can be traced back to the wealthiest elite; US$176 million was donated by the top 158 richest families in the first stage of the political campaign alone (Confessore, 2015), with the vast majority leaning towards the laissez-faire right-winged Republicans. What should scare vulnerable voters most is not just the ease and excessiveness of control from the business elite, but the covert secrecy of sending ‘donations’ through subsidiary businesses and alternative addresses that shade the true source of donations. They say that those who denied it supplied it, and something definitely smells off.
It is one thing for the fat cats to splash their cash for a better feed, but it is another thing to be eating the food of the other neighbourhood cats. Lobbyist representatives have not only exercised significant control over the political domain for decades, but done so at the expense of the political voice of the average American. A 2014 study released by Princeton University Professor of Politics Martin Gilens and Northwestern University Professor of Decision Making Benjamin I. Page explored a number of theoretical traditions that aim to explain the mechanism of interaction between different sets of actors and the government, including the average American citizen, the wealthy and social elite as well as business and union parties. The summarised graph below shows a stark image of the 1,779 policies passed by parliament between 1981 and 2002, comparing the percentage support from different agents with the likelihood that the proposed bill will be passed. Whilst the interest levels of most hard-working American citizens have minimal gauge of the efforts of the nation’s politician’s efforts to pass a potentially socially beneficial idea, there is a clear, strong positive relationship between interest and success of legislation backed by the elite.
Of course, such policy favouritism hurts the economic outcomes of the non-wealthy majority. According to the Starlight Foundation (Allison and Harkins, 2014), US$5.8 billion was donated by the nation’s elite, only to receive US$4.4 trillion collectively in taxpayer support. Proportionally, this sum represents almost two-thirds of total tax revenue collected by the Federal Treasury from tax-paying Americans. That equates to an average return of 76,000% for just the Top 200 firms alone. Compare this to the average tax return for US citizens, which in 2015 was US$2,893 (Sahadi, 2016).
A sting of deregulation and a lack of control from the Federal Electoral Commission (FED) is largely to blame for this democratic collapse. The 2010 Supreme Court case of Citizens United vs. FED overruled two previous long-standing court rulings, thereby eliminating former donation ceilings for wealthy corporate agents and removing the illegality of undisclosed finance (Liptak, 2016). What was argued as a constitutional right to a freedom of speech is quite clearly a pedestal of political influence for the elite. Adding insult to injury, the chairwoman of the FED, Ann M. Ravel, has publically admitted to giving up on preventing any unlawful raisings and usage of political campaign funds – given whatever legal restrictions remain – due to the constant gridlock in decisions made by the three Democrat commissioners and three Republican commissioners with the FED (Lichtblau, 2015). Quite simply, the current electoral process is a farce and a spit in the face to modern democracy.
Laurence Lessig put it, “You and I both know that as long as our representatives are held hostage to their funders — and their funders are not all of us — our system will not work”. With free speech there should come fair speech, unclouded by the pollution of finance. It is time that parliament realised the harm unregulated corporate political campaign funding can have on the wider society and contain the virus of corrupt political donations. Although the election has a variety of effects on money in financial markets and the economy as a whole, the money going into the elections is what the American population should be most concerned about.
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The CAINZ Digest is published by CAINZ, a student society affiliated with the Faculty of Business at the University of Melbourne. Opinions published are not necessarily those of the publishers, printers or editors. CAINZ, our Partners and the University of Melbourne do not accept any responsibility for the accuracy of information contained in the publication.
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