Don't let politics break your brain in assessing the U.S. economy
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The last four weeks have been a seismic period for U.S. politics. But in making economic decisions — whether to buy a house, take a new job, allocate retirement savings or invest in a business — it is usually better to leave your politics brain at the door.
Why it matters: It's not that political outcomes don't have economic effects — policy choices matter for the economy in the long term. It's just that those effects are slow-moving, frequently non-obvious and always contingent on many other unknowables.
State of play: Four weeks ago Thursday, the sitting president blundered through a debate. Eleven days ago, a gunman nearly assassinated the former president. Three days ago, the current president withdrew from the race, handing the baton to his vice president.
- Oh, and along the way, the former president was formally nominated for a new term, he picked a vice presidential nominee, there was a NATO summit and the current president got COVID.
Yes, but: However unnerving the news may have been lately, politics hasn't historically driven economic outcomes in a linear, predictable way.
- The archives are chockablock with certain-sounding predictions — frequently with an ideological subtext — that proved simply wrong.
- In 2016, economists predicted that a Trump victory would sink the stock market, trigger a global recession or cause inflation to surge. Warnings that Obama and Biden presidencies would sink stocks were commonplace.
- If you spend a lot of time following politics — and have a strong preference for who should win — it's easy to overestimate the impact that political results have on the economy over any actionable time frame.
What they're saying: "An election is usually overstated as an influence on the economic cycle," Philipp Carlsson-Szlezak, author of a terrific new book called "Shocks, Crises, and False Alarms: How to Assess True Macroeconomic Risk," tells Axios.
- "Political volatility is unusually high, but for politics to leave a material impact on the economy, we need legislation, not just electoral victories," he says.
- "There are areas of presidential policy discretion, such as tariffs, but it's a high bar for an election outcome to shape or cut short the cycle," says Carlsson-Szlezak, the global chief economist at Boston Consulting Group.
The intrigue: Part of the challenge of mapping how political results will affect economic results is the proliferation of second- and third-order effects that any given policy decision can have.
- For example, former President Trump's calls to open the floodgates for new energy drilling might sound like a positive for the energy sector — but if all that new supply drives oil and gas prices down as intended, it may not be so great.
- Some 230 oil and gas drillers went bankrupt between 2015 and 2020, after all, due to overinvestment in the early 2010s followed by a price slump.
- In any industry, you can find a similar set of crosscurrents in which policy choices — around taxes, regulation, trade, monetary policy and more — make for unpredictable results.
Or suppose you're thinking about buying a house and want to know if mortgage rates will be higher or lower if a given candidate wins in November. The answer would depend not on campaign trail rhetoric but a long list of specific decisions the candidate would eventually make as president.
- The list includes decisions about fiscal deficits (all else equal, higher deficits means higher rates), Federal Reserve appointments, and second-order policies like tariffs and immigration that affect rates by shifting the inflation and growth outlook.
The bottom line: There are untold moving pieces in a $28 trillion economy, so if you think you're absolutely sure of how a given election outcome will affect any one of them, you might just be letting your politics brain do the thinking for you.
