Investors said that if Donald Trump became president, financial markets would suffer badly. They were wrong. Now, they’re saying that if Elizabeth Warren becomes president, financial markets will suffer badly. Should we listen? I asked business columnist Josh Barro to help digest their argument — or lack of one.
Ben: CNBC reports that some prominent Wall Streeters are sounding the alarm about an Elizabeth Warren presidential win (including Leon Cooperman, who has been saying a lot of things lately). They caution that if Warren emerges victorious next fall, the stock market will plummet — more than temporarily — and all hell will break loose. But these warnings echo ones they issued about President Trump in the 2016. In the end, the market, and much of the corporate world, has reacted warmly to Trump, most of whose economic policies they’re fine with. Would Warren winning actually be different? And how much should the average person care, anyway?
Josh: Well, so first of all, it wasn’t just market participants who made those warnings about Trump. It was the market itself, which moved up on news that Trump was likely to lose and down on news that he might win, through and into election night. I wrote about this in September.
The thinking at the time seemed to be that Trump would be a chaos agent as president, likely to harm the economy through the introduction of uncertainty, and also that he might pursue trade policies that hurt the economy. The subsequent view (apparently adopted in the middle of the night he won, if you follow the market futures charts) is that Trump would be good for business. That he would pursue corporate tax cuts, and broadly that he would pursue policies that would be good for economic growth and especially for after-tax corporate profits. Markets do move in anticipation of who wins elections and what policies they might pursue. So I do find it plausible that markets would find the prospect of a Warren win to be especially bearish.
She has pledged not only to undo the GOP corporate tax cut, but also to further increase taxes on the foreign profits of multinationals. That should reduce after-tax profits available to shareholders in the future and therefore reduce share prices. Her anti-monopoly policies are explicitly aimed as pushing prices down through competition — good for consumers, not good for shareholders in those (allegedly) monopolistic companies. Warren would surely counter that her policies would rebalance the economy in a way that ensures sustainable growth for the long run — real estate crashes aren’t good for anyone, including stockholders — but it’s likely her effects on overall economic performance would have small effects compared to her effects on the specific economic fortunes of shareholders.
Ben: This all seems like basically part of the plan for Warren, though. Every time a billionaire denounces her policies, it’s basically a campaign ad for her, since her whole thing is that the interests of Wall Street are disconnected from those of the vast majority of Americans. In keeping with that theme: Should most Americans actually be concerned about what the market does in this situation?
Josh: I think people do have reasons to worry about a capital strike — if owners of capital stop investing because they’re so worried about Warren, that would hurt economic and job growth for everyone. Of course, a capital strike, like a labor strike, requires solidarity. And so if it means owners of capital giving up otherwise profitable investing opportunities just because they’re mad, then other investors would be likely to just swoop in and invest their own capital instead. But there could be either a self-fulfilling prophecy (for example, where some business owners’ reluctance to invest harms the economic outlook and causes other investments to be unprofitable) or irrationality (where owners of capital sincerely but incorrectly believe Warren will harm their interests more than she actually will) that could cause a perilous decline in investment.
Of course, many people also own stocks, and they would lose out directly when stock prices fall. Warren I think would have a good argument that policies that increase the labor share of the economy (that is, more of output goes to wages, less to profits) are good even for workers who own stocks. But since the stock price drops would likely show up first (in anticipation of future changes in the labor share) that would involve a certain amount of trust. I should note, I don’t want to overstate the likely size of these effects. Small business owners are a heavily Republican-leaning group. They reported much lower sentiment about the economic outlook under Obama than under Trump. It’s not clear those sentiments have had large effects on their actual business investment choices. Warren is probably more alarming to Republican businesspeople than Obama — and if she could truly implement her whole agenda, she’d have much larger effects on their fortunes than Obama. But in practice, these effects are usually not large, in part because other political institutions severely limit the amount of policy change politicians actually achieve.
Ben: Implementing her whole agenda, or even a good chunk of it, would be an extremely heavy lift. Some of it would require congressional assent that simply isn’t going to happen, as with true Medicare for All. It’s true that Democrats might roll back or repeal the 2017 tax cut if they have all three branches of government. But doesn’t most of the economic activity in any president’s tenure depend on factors mostly outside of the political realm? Voters tend to overstate the effects of the president on the economy generally — do investors fall into the same trap?
Josh: Presidents and even the government do not have that much influence on economic output. They have more influence over after-tax corporate profits, though, especially through corporate tax policy. And since stock prices are supposed to be a measure of future after-tax profits, it makes more sense to think about politics as a key input into stock prices than to think of them as a key input into GDP.
Ben: For the people issuing these warnings, do you think this is more about legitimate fears, or more about doing what they can to make sure Warren doesn’t win the nomination or presidency? A lot of people on Wall Street see her rhetoric about the financial sector as overheated and inaccurate, so it may not ONLY be about the money, but about pride and emotion, too.
Josh: I don’t know exactly why big-name investors are talking to CNBC about this. People have lots of predictions about things they don’t really know about, but talking is fun and people like being in news stories. And yes, if you’re Warren, your favorite thing is Wall Street fat cats whining about you. What I’d like to see is actual financial market reaction — what happens when an event materially changes the likelihood that Elizabeth Warren will be our next president. But it’s rare to have political events so sudden and seismic you can see them on the stock charts. It happens occasionally (e.g., the release of the Access Hollywood tape), but there hasn’t been a single event that moved Warren’s odds of being president by enough to get a good test.
Ben: Though, as we’ve seen, markets can have a major reaction (as they did immediately after Trump’s win) and then adjust pretty quickly.
Josh: Yeah. I still don’t fully understand what the markets thought they learned overnight on November 8, 2016, that they didn’t know prior. But their revised sense of Trump — likely to cut their taxes and not destined (so far) to cause major economic disruption — seems to have been the correct one.
Ben: Why do you think we aren’t hearing these lines as much about Bernie Sanders? Is it simply that people don’t think he as much of a chance to win?
Josh: Yeah, I think mostly for that reason. There may secondarily be a sense that Warren is a cannier operator who would have more success using executive power to pursue her regulatory agenda than Sanders would, in a way that would be bad for the wealthiest investors. But I think it’s primarily, people are afraid of Warren because they think she might win, and they don’t think that about Sanders.
I think there’s one other thing we should note which is, if the markets really are bearish on Warren, and if she is the nominee and becomes heavily favored to win the general election, her effect on stocks should be priced in before the election. That is, the fall in stock prices should happen before the vote. Trump would surely blame it on her (as he would do with a fall in stock prices not caused by her) but she of course could blame it on him. And I think people would be more inclined to blame the current president than a potential future president for stock market performance.