The Trump Bubble

Something very strange happened in the 24 hours following the election. Going in, everyone on Wall Street “knew” that Hillary Clinton would win. It is an old adage that Wall Street hates surprises, so everyone also “knew” that the stock market would get clobbered if Trump somehow won by mistake. Indeed, as the results became known, markets in first Asia and then Europe plunged. Futures for the US stock market began to predict a brutal day for American stocks as well. But, as 9:30 AM November 9 approached, (which marked the opening of the US stock market), European markets and US futures began to recover strongly. In fact, US stocks as measured by the S&P 500 index not only rose strongly that day, but they have gone on a tear ever since, in what has come to be called “the Trump rally”. Literally overnight, the market went from fear and despair to euphoria. Euphoria is something Wall Street is very good at, but it usually ends badly. So call this my year end forecast edition.

Before I look forward, however, I should provide some background. It is vital to keep in mind that the stock market is not the economy. In the best example of this, when companies merge or lay off workers for any reason at all, unemployment increases, which then reduces consumer spending and thereby hurts the economy over a longer period of time than most people appreciate. But an announcement of a merger or layoffs almost always boosts the price of a stock, because profits increase. What is good for stocks more broadly can also be bad for the nation, so a new law or president that greatly weakens the EPA for example increases the profits of companies that pollute, but it means poisonous air and water for the rest of us. Given this, you might expect that voters would reject any candidate that Wall Street liked, and indeed there are some progressives who vote that way. But that ignores that fact that Wall Street is not monolithic. Individuals like George Soros may be hedge fund billionaires, but they recognize that, over time, progressive causes are good for the country and the markets.

You also can not say that voters are going against their own economic interests without thinking about the 401(k). Today, it is easy to think that 401(k)s have always existed. In fact, however, they are named for a section of the tax code in a 1978 law, and they only took off after a rule interpretation in 1981. Look at a graph of income inequality, and you will see that our current situation has its roots around this time. Yes, Reagan’s tax policies also made a big difference, but 401(k)s have made a big difference in our politics. Before the 401(k), companies provided retirement benefits through defined benefit plans. This meant that you were guaranteed a pension that grew predictably over time, no matter what the stock market did. The 401(k) is another matter, and it has replaced completely the old defined benefit plans for most workers. With a 401(k), you contribute to the plan with an employee match, but how it grows is entirely based on how the stock market performs. I’m simplifying somewhat, since most 401(k)s also offer money market and bond options, but the big gains are to be had in the stock funds offered. The greater risk is also to be found in these funds, but too few people appreciate that. What’s important is that 30 years on, voters now have to weigh the health of the nation against the possible impact on their retirement funds. The Trump rally is good for Wall Street traders, but it is also good for your 401(k).

This, of course, is short term thinking, but that is how many people vote. Retirement planning done properly however involves thinking in the long term. Policies that provide a social safety net and help share the wealth throughout society boost consumer spending over time, thereby creating jobs, which create more consumer spending. On the other hand, policies such as tax cuts for the rich and assaults on safety net programs concentrate wealth in the hands of a few, reducing both employment and consumer spending over time. This is ultimately bad for stocks and corporate profits, which is why the market consistently performs better during Democratic presidencies than Republican ones. And the difference is not small.

The Trump rally is short term thinking at its finest. After the initial panic, analysts began drool of the prospect that expensive regulations would be swept away by the new president and the Republican congress. Healthcare companies and insurers expect increased profits as the Affordable Care Act gets kneecapped. That means they will pay less and we will pay more for healthcare. The demise of environmental regulations is expected to be profitable for polluters in raw material industries. Military contractors look forward to a new arms race with Russia. Investing in general and the mortgage industry in particular will see a return to the casino environment that preceded the 2008 financial crisis. But the most absurd part of the Trump rally is the idea that Trump’s infrastructure plans will mean a huge increase in government spending. In fact, Hillary Clinton’s infrastructure proposals would have had that effect, but Trump is talking about tax incentives and privatizing things like toll roads and bridges, many of which are currently free. Initially, companies will reclassify existing projects wherever they can to get the tax benefit, diluting the power of these programs to create jobs. Over time, the new toll roads and bridges will be a burden on drivers, and therefore a drain on consumer spending. So, once again, your 401(k) may benefit in the short term, but the economy will suffer in the long term. Actual infrastructure spending by the government would never pass in this congress, even if that was what Trump had in mind.

So, here is my stock market prediction for the Trump presidency. In 2017, we will be operating under the last Obama budget, and many of our current laws will still be in effect. The economy will continue to create jobs for which Trump will try to take credit, but in reality job growth will slow as Trump’s changes begin to take effect. The stock market will drop somewhat in January as the current rally stalls, but the market will be up slightly at year end. In 2018, we will begin to see the full effect of Trump’s policies. From that point to the end of his presidency, the market will fall. We will see a new recession by 2020, the severity of which will depend on whether the Democrats can gain control of the Senate in 2018 and curb some of Trump’s worst impulses. The market will also fall if Trump finds a way to get himself impeached. That seems likely when you consider his contempt for our system of laws and the Constitution. So over all, voters can look forward to four lost years for their 401(k) plans.

“He Doesn’t Know the Territory”

Not to dismiss Russian hacking, voter suppression in key states, and other outside factors, but Donald Trump won the election as well because he is a much better salesman than Hillary Clinton. Actually, Hillary Clinton probably had the least sales skills of any major party general election candidate in my lifetime. This is not a compliment to Trump. I speak as someone who worked as a telemarketer for ten years, and received additional sales training during a year I spent trying to be a stock broker. This is soul-destroying work that requires you to put your conscience on the shelf, hopefully to be used later. Sales is an acting job, and a key talent of a successful politician. That’s why Ronald Reagan was so good at it. You must persuade people with values that are alien to you that your way deserves their support. It is not either enough or even necessary to have the moral high ground. Sales is how Republicans get working class voters to vote against their best economic interests. You must believe your arguments while you are presenting them, even if you know they are nonsense, or if they don’t really reflect your reasoning.

To see how this works, consider the issue of universal healthcare. Hillary Clinton tried to get universal healthcare back in 1993, but she thought selling it meant listening to arguments from all sides, and then crafting a program that helps everyone. It’s impossible, because you can not avoid harming insurance companies when you take them out of the healthcare game. Bernie Sanders tried to sell universal healthcare as a moral imperative, but we have just had conclusive proof that, for enough voters in key states, elections are not about morality. Elections are about “What’s in it for me?”, and too many voters vote defensively to avoid helping someone who might be in competition with them for services and benefits.

Despite this, I am not saying that we should give up hope of ever seeing universal healthcare in the United States. I am saying that we need a better way of selling it to voters. We should be making the capitalist argument for it. There really is one. Universal healthcare is a major job creator, and it can help to prevent jobs from being outsourced to other countries. Under our present, broken system, we have given twenty million new people health insurance they can not afford to use. Getting sick means spending money you needed for other things on getting treatment instead. That means getting sick is a major drain on consumer spending, Universal healthcare would mean you never have to divert funds for getting better, so it all goes to consumer spending. That increases demand, and that is where jobs really come from. Universal healthcare also means keeping jobs here in America. Under our current system, American companies operate at a major competitive disadvantage. Having an American workforce means you are penalized with huge health benefit expenses. Yes, you can pay much lower wages to workers in China and Mexico, but the healthcare costs really seal the deal and make it worth the expense of moving jobs to other countries.

That’s the pitch, but we also need someone with the right personality to make it. Hillary Clinton proved that the right contacts and the best fundraising machine is not enough to get it done. We need someone who thrives on working large crowds, but can also score points in a televised debate. We need a bulldog who will not leave any criticisms unanswered, but will rapidly respond without seeming mean. Clinton’s basket of deplorables remark was terrible from the point of view of making the sale, as was Mitt Romney’s 47%, because you must never insult a potential customer. It doesn’t matter if you think you are at a private function, because everything you do when you run for president is public. I don’t know who the right person is for this, but we have four years to find them. In 2020, this person will have the facts on their side, but the facts will never be as important as the pitch.

In closing, I don’t usually include music with my posts, but this really needs to be here:

A Ray of Hope

There are many reasons why Donald Trump will be are next president, and this result makes me fear what will happen to our country. I would like to say that the Democrats, or even the Republicans, have learned a valuable lesson from this election, but I see no sign of this yet. But certainly, this election was a shock to the system. Professional pollsters learned that this country is a much darker place than they thought, and their precious science was wrong. They will be scrambling to understand how to fix their models, and that will have an impact on how we conduct our elections in the future. But that is not what gives me hope going forward. The first signs I see that something positive can come from this are the reactions in the media.

The media coverage of the campaign can certainly be blamed for the election of Donald Trump. Both the false equivalences promoted by the mainstream media and the proliferation of fake news on social media were gifts to the Trump campaign. Together, they enabled what has been called the “post-factual” environment where Trump was somehow more trustworthy than Hillary Clinton. But it seems to me that people in the media are genuinely horrified at what they have done, and the reactions of the public are contributing to positive change in ways that I don’t see elsewhere in our society yet.

Consider this recent article on Vox by German Lopez. Lopez takes the New York Times to task for false equivalency for a paragraph that came deep in an article about the atmosphere on college campuses in the wake of the election. The actual paragraph read:

According to a campuswide message from Mark Schlissel, the university’s president, bias incidents have been reported. A student walking near campus was threatened with being lit on fire because she wore a hijab. Other students were accused of being racist for supporting Mr. Trump.

Lopez was actually being dishonest in his reporting. He misquoted the paragraph this way:

Bias incidents on both sides have been reported. A student walking near campus was threatened with being lit on fire because she wore a hijab. Other students were accused of being racist for supporting Mr. Trump, according to a campuswide message from Mark Schlissel, the university’s president.

So the New York Times is simply reporting that Mark Sclissel included both a concrete threat to a student and accusations of racism in his report as bias incidents, but Lopez rearranges the paragraph to make it seem that the New York Times is drawing no distinction between the severity of these two acts. Lopez also makes it seem that this was the focus of the New York Times article, when in fact it was buried deep in what I found to be a fair piece of reporting. Lopez’ article also had a fine example of a click-bait headline: The New York Times’ False Equivalency Problem, In One Paragraph. So the Vox article was not a bad example of the problem of misleading reporting, but I still see hope in this incident. I could wish that Lopez would have found a better example to make his case, but I am glad he tried, because false equivalency was a big problem at the New York Times and elsewhere leading up to the election. On the other hand, I have seen a change in the tone of the Times’ reporting since the election, which may be why Lopez had to report this the way he did. They have been critical of Trump in recent articles, and they no longer seem to be bending over backwards to criticize his opposition at the same time. The New York Times also received a lot of criticism for the article Lopez flagged, to the point where they felt the need to issue a public response in defense of the article. So they know that people are paying attention, and that is a positive sign in its own right.

Meanwhile, I have seen a steady stream on Facebook of articles from various sources about how to spot fake news. Most have had generous lists of links to fact checkers and sources for responsible reporting. There have been arguments on the left about some of the liberal sites that have been named as sources of irresponsible reporting, and I have even seen cases where some sites were removed from lists of offending sites after someone raced to defend them. This is all to the good. (Full disclosure: Vox is an opinion site that I rely on for some of the writers who work there, my comments above notwithstanding.) Facebook and other social media sites have been seeing pressure to ban fake news, which is difficult to completely eradicate. But we can hope that this combination of pressure and education will limit the damage fake news can do in future elections.

Of course, money speaks louder than the loudest complaint or the most gentle persuasion. But there are positive signs here as well. Major consumer companies have been using bots that place their ads all over the web, but I saw a report that, since the election, some companies are asking to have their ads removed from sites like Breitbart that air fake news and promote racism. The public can get involved here by pressuring advertisers, even to the point of threatening boycotts. It doesn’t matter how many clicks a Breitbart gets if they don’t have advertisers to pay the bills, so it may really be possible to, as it were, drain the swamp. Money can also be put to positive use, and there are hopeful signs here as well. Non-profit fact checkers and investigative journalism organizations have been reporting an upsurge in donations since the election.

All told, I see since the election some soul searching on the part of the media. There seems to be a genuine concern that they enabled the election of Trump, and a real effort to find ways to do better in the future. The public is engaged, both as a watchdog and as a source of targeted funding. The only question is how long this will continue. I hope this election marks a final repudiation of “fair and balanced reporting”, aka false equivalency. While I think it is probably optimistic at best to think we can take down a Breitbart or a Fox News, we can challenge their business model with our spending decisions. On the left, we can and should demand responsible behavior from our media sources. And most of all, we can learn how to make better use of the information sources we have, so that we don’t get fooled again. We can not avoid four years of Trump/Pence, but we can work towards a media environment that will prevent a repeat of this election. It is starting to happen, and I hope it will continue.

How to Elect a President

In the wake of the presumed election of Donald Trump as our next president, there have been calls to abolish the Electoral College. This will be the second time in my experience that I personally was robbed, having also voted for Al Gore in 2000. So I have long agreed that we should get rid of this odd historical relic that now has the potential to subvert the will of the people. But I have come to realize that I was wrong. The problem is not that the Electoral College exists, but rather that we are not using it correctly.

Think about it. Hillary Clinton lost because she failed in the states that had the electoral votes she needed. But that was part of a much larger problem. Polls show that winning candidates are usually taller than their opponents. They tell us that who the voters would rather have a beer with is more important than what a person would actually do as president. Marital infidelity may tell us nothing about how a person would govern the nation, but it can end a political campaign or even be grounds for an unsuccessful impeachment.

I thought for a long time that the Electoral College was simply a historical anomaly. In eighteenth century America, the United States consisted of only thirteen states, but crisscrossing those to make yourself known to all of the voters was impossible in an age long before automobiles, trains, or airplanes. Likewise, the technology that makes mass media possible was at least a century away. So voters could not possibly get enough information to make an informed choice for president. As that changed over time, the current system developed, where we assume that any voter can easily get all the information they could possibly need, so we vote directly for the candidate of our choice. The problem we face now, however, is that we have access to too much information, much of it false or unreliable, and I can see no way that a filtering system could be devised to purify our information stream. This election was decided as much as anything else by fake news and the ability to spread it effectively.

If we go back to the original design of the electoral system, we may be able to solve this problem. The founding fathers knew that a lack of information could mean that direct election by the people of their legislators and especially their president could allow a tyrant to win. We now know that our modern-day information glut poses the same danger. So they devised a system where the voters, instead of voting for a president, voted for electors who would then meet and make that choice for us. Electors were people who were known in their respective states, and they would detail the qualities they would support in a president, and that would be the basis of the people’s choice. Today, even the size of the states is too big for this to be effective. Breaking it down further, even a congressional district may represent more than a million voters. To solve the problem, we must have a system that selects electors at a local enough level to bypass the problem of gerrymandering as well.

So here is how I would solve the problem. I live in a small town in New Jersey. My state is reliably blue in presidential elections, but there are red patches throughout New Jersey. No state is monolithic in this way. New Jersey had 14 electoral votes this year, meaning we have twelve congressional districts. But my town has two voting districts, and the surrounding township has fourteen more. There should be a national standard for the population of each of these voting districts, and a polling place for each one. We could then vote for a pre-elector, if you will, from each of these voting districts. Prior to the election, local candidates for pre-elector could hold a series of town halls where they could meet and greet the voters, and conduct Q&A sessions. They might have party affiliations, but they could not align themselves with any candidate nationally or for the office of statewide elector. On Election Day, people would go to the polls to select their pre-elector. The top vote getter in each voting district would win. These pre-electors would them attend a state electoral college. They would be presented with candidates from around the state, and they would be forbidden to vote for themselves. This could probably be best enforced by requiring that pre-electors could not run as statewide electors in the same year. In New Jersey, the top 14 vote getters at this state electoral college would then represent New Jersey at the national Electoral College, where they would choose the president. Variations on this system could also be used to choose members of the House and Senate.

Note that no member of the Electoral College would be bound to any candidate. The pre-electors would have to earn the trust of their communities with their presentation of the issues facing the country. Likewise, national media outlets leading up to the election would not be able to base their coverage on personalities, so they would hopefully spend more time on the issues of the day. This system would also take money out of the process of choosing our government. Because electors would be unbound, and pre-electors could not align themselves with any candidate, a sitting president or senator say would not have to neglect their duties to run for re-election. Lobbying would also have to change, because campaign cash would not be the incentive it is now. There are surely problems with this proposal that would only become apparent after it was implemented. Surely, powerful people who benefit greatly from the current system would resist making this change. Not only the moneyed interests who have so much say in our current system but also the media outlets who rely on their advertising dollars would suffer.But I am not sure that even a Constitutional amendment would be needed to make this happen, and the potential advantages are surely worth considering.