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How Does the Republican Tide Affect the Business and Financial Outlook?

If you’re a Republican partisan, tonight was a very, very good night. If you’re an ordinary person trying to suss out the business and financial outlook, tonight was basically a non-event.

Nothing that happened on Election Day 2010 was a surprise. The results basically match what non-political junkies been expecting for months.

We’re going to get no fundamental change in the overall approach to policy. (Democrats will not interpret the results as a repudiation of what they want to do). But we’re also going to get a House leadership that will curb the worst excesses of liberal partisans running amok. In a word, stasis.

What that means for the outlook is: no short-term tax or regulatory relief, and no relief from the medium-term entitlement crisis.

The first of these is manageable. Everyone I know expects the Bush tax cuts to extend for at least another year. That’s the path of least resistance. But it’s not real pro-growth tax relief, as a sharp, permanent cut in the cap-gains and top income-tax rates would be.

This is manageable because business will keep doing what we’re already doing: expand in foreign markets and leave earnings and investments overseas. This is now the default, no-brain thing to do.

The entitlement problem is different. For roughly the next generation, the pattern of consumption in the US will shift from producers to retirees. There’s literally nothing that tax changes can do about this, because the shift is inevitable. The returns from working hard and being successful will simply be a lot lower than in the past, because they’ll have to be shared with nonproducers.

I caught myself thinking about this in my own case. Who needs to work 80-hour weeks just for the sugar rush of watching someone else consume 55% of the gains? It’s really not worth it.

There is a handful of people out there with an honest shot at turning some strong vision, hard work, and really good luck into chunks of equity worth $100 million. This will continue to be worth having done.

But the vast run of entrepreneurs, whose best hope is to make ten or so million bucks over twenty years, will face a very
different equation. That kind of outcome is at the fuzzy low end of being "wealthy" (which I define as the freedom to spend your time as you choose). The problem is that society, in its wisdom, can choose to take your wealth away from you too easily.

If you own $100 million and the government decides to take half, you’re still wealthy. If you lose half of $10 million, though, you’re back to working 80-hour weeks. That’s the equation people will face. Why take that risk?

So the broad theme of the next decade will be that, for the vast majority of people, working hard and taking risk doesn’t pay off.

This is going to give us a sclerotic economy that produces few really good jobs. But it doesn’t mean the US will descend into poverty. Just as we funded the consumption boom of the last 30 years with unsustainable increases in private debt formation, we’re going to fund the next 30 years of consumption by non-producers by running down the capital stock
of the US.

All of this is linear trend projection, an exercise that is known to produce incorrect results due to the non-linearity of events. Over long-enough time scales, history is always discontinuous. The positive surprise that messes all this up, is some kind of new industry or business model that produces a sharp increase in overall productivity. By making production itself cheaper, that will make it possible to sustain relative overconsumption by non-producers. I actually have some hope that this could happen.

A change in government policy to favor growth is also possible. But because this requires a Republican President, it’s a medium-term outcome at best. I do NOT believe it’s politically possible in any case for the US to reduce relative consumption by non-producers (retirees, the poor, and government employees), as Britain, France and Germany are.

There’s also the potential for a downside surprise: a widespread, possibly global, war.

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