Note to readers: Swamp Notes is taking a short break. We’ll be back on June 22.
Way before Covid-19 and Black Lives Matter marches, I felt certain we were headed towards an era of wealth redistribution. The past couple of months have only made me feel more strongly that the pendulum between capital and labour is about to shift — if only a bit — towards the latter. The markets must think so, too, because they are starting to price in the chances of a Democratic sweep of Congress and the White House in November — thanks to the President Donald Trump’s truly epic mishandling of both the pandemic and the protests. Gallup’s most recent poll shows that Trump has only a 39 per cent approval rating, which is the same level as Jimmy Carter and George HW Bush had before they went on to lose their elections. Like Trump, they struggled with increasing unemployment in election years.
If the Democrats are in charge, there’s little doubt we’ll see higher taxes, on both individuals and corporations. Indeed, Joe Biden has promised to repeal the Trump-era tax cuts whether or not the US is out of the coronavirus crisis should he win. He’d also raise the capital gains rate that disproportionately rewards asset owners making more than $1m, and get rid of carried interest loopholes, as well as doubling the global minimum tax on offshore profits.
There are signs that companies are already planning for this kind of future. Consider the possibility of a merger between AstraZeneca, a UK-based pharmaceutical company, and Gilead Sciences, a US biotech group. As a Strategas research report noted on Thursday, this sort of deal, in which a non-US company purchased an American company in order to “invert” tax domicile and pay a lower overseas rate, used to be quite common. The Trump tax reform, which lowered the corporate rate and got rid of double taxation on foreign income, made this much less common. Now, with the prospect of higher taxes, companies might look to relocate again.
Conservatives would argue this is exactly why the Trump tax “reforms” were good for the economy, but I’d argue that the only people they enriched were the C-suite. Tax inversions, stock buybacks and other forms of financialisation, helped along by a decade of easy money monetary policies and now a new Covid related helicoptering of money into the markets by the Federal Reserve, have kept asset prices well above what any sane person thinks they should be. After all, we have Great Depression era unemployment numbers and a likely second wave of virus infections coming down the pike. To me, the only thing surprising about Thursday’s correction is that it didn’t happen much sooner.
I suspect that as the reality of a Democratic sweep and the changes that will come with that set in, we’ll see further drops. As I write in my column out this coming Monday, Black Lives Matter isn’t just about race — it’s also about the wealth gap. African Americans have struggled for decades with stagnating wages, higher unemployment levels, and student debt that the broader swath of the population is now grappling with. These are some of the issues, along with things like police violence, that marchers are protesting, and that may be one reason why the demonstrations have become so big and so broad. They aren’t just happening in Newark or Watts, but in Boise, Colorado and Europe.
That could turn BLM into not just a racial justice movement, but a new kind of labour movement. To me, that would be a good thing for economic growth in the mid- to longer-term, because it would create higher wages and consumer demand, without which you can’t grow a mature economy. But there’s little doubt that it would dampen corporate profits in the short term. As David Rosenberg of Rosenberg Research put it in a prescient report earlier this week. “Aided and abetted by the Fed, the wealth gap just keeps getting bigger and bigger. And so, here we have [in BLM] the makings of a backlash, probably like Occupy Wall Street but on steroids.”
Ed, do you see it that way too? And if so, what might the broader political consequences be in your mind, in the US and beyond?
Foreign Affairs’ latest issue, The World After the Pandemic, has a number of interesting pieces, including one by the US trade representative Robert Lighthizer (one of the few people that one could imagine straddling both the Trump White House and a Democratic one) on the path between protectionism and globalism, and a good review of Thomas Piketty’s latest ambitious doorstopper After Capital.
And in the FT, I was a bit envious that my colleague Robert Armstrong nailed in 800 words what it took me my whole first book to capture — “rising markets and inequality grow from the same root”.
Edward Luce responds
Rana, I strongly agree that this is a moment of potentially very significant change. When was the last time you saw white people marching against racial injustice in small town America? Forget New York, DC and San Francisco. There have been demonstrations in Montana, Utah, Hawaii and elsewhere. By the same token, when was the last time you saw global demonstrations — still less the toppling of statues across the Atlantic — in response to racial injustice in the US? The answer is before you were born — and when I was roughly zero (I was born in 1968). From Antwerp to Adelaide, and the ruins of Syria in-between, people have been coming out in horror against the killing of George Floyd. I have never seen anything quite like this.
Will it result in lasting changes such as the civil rights revolution of the 1960s? I don't know. The goals today are more complex, and the tasks more multi-layered, than simply doing away with Jim Crow-era segregation by statute. This fire started in Minneapolis, not the Deep South. It could just as well have started in Connecticut or Wisconsin. Two things, however, seem clear to me. First, this reaction is taking place in the context of Covid-19. The lockdown has been a weird and somewhat existential journey so far. It’s very strangeness has opened up people’s minds to things they may not have previously stopped to think about (I’m talking about white people here). It has also driven home the un-exceptionalism of American government. I don’t need to belabour that point. America’s record on Covid-19 is not glorious.
Second, would this public outpouring have happened without Trump? Any other president in the past 50 years, including Richard Nixon, would have tried, however fleetingly, to heal America’s racial divisions after such a horrendous death. Trump did not even make the pretence. In an odd way, his naked transparency is spawning the kind of public determination that someone like Barack Obama, or Bill Clinton, could never achieve. Trump may be the trigger of some very unexpected unintended consequences. Finally, let me direct Swampians to this excellent 11-minute video by my friend Gary Younge, about why riots happen. Please take the time to watch it with an open mind. It is as pithy and clear as you get.
And now a word from our Swampians . . .
In response to The future of cities:
“It occurs to me that the loathsome coward that currently occupies the White House may actually cause more lasting social change than some of the more effective leaders we have had in the last several decades . . . In the current leadership vacuum, we are left to address social injustice ourselves. No one is going to take the mantle of responsibility and accountability for me, so it is now my problem to solve, as it is yours, and our neighbours and every other individual. We have proven time and again that morality cannot be legislated, and neither can social justice. Only individuals can create the environment for change through their thoughts, actions, and votes.” — Robert S Hatfield Jr, Portland, Oregon
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