Policy Swings, Partisanship and Golden Gridlock

Editors’ Note: This article touches on an array of political and politicized topics, so we remind you that MarketMinder favors no political party nor any politician, assessing developments solely for their potential market impact.

In our politically polarized nation, there seemingly isn’t much a majority of people can agree on. Perhaps we can all find common ground over the State of the Union being boring and over-choreographed regardless of who delivers it. (Big applause here.) Or maybe we can simply break bread over how vexing the circus is. That seems to be the reigning mentality among US corporate leaders: According to a new Conference Board report, 78% of Corporate America’s legal and government relations execs described American politics today as “extremely challenging or very challenging” for business, up bigtime from 47% in 2021.^[i] The Conference Board’s Paul Washington summed up the mood thusly: “The combination of a polarization among policymakers, coupled with extremely close elections, means that companies are facing potentially wide swings in government policy with each election, which is not conducive to business planning and investment.” We are inclined to agree—which is why we think the current gridlock is such a positive. It gives businesses more confidence that, through 2024 at least, the rules won’t change much. But the uncertainty beyond that illustrates why big legislation, whether you love or loathe it, generally doesn’t have the impact some hope and other fear. Let us explore.

The execs’ concerns didn’t center on taxes or individual policies—they were more big-picture. The top issue, cited by 89%, was “polarization/extremism among policymakers,” while three-fourths cited policymakers’ “anti-corporate rhetoric/action.” That is all a bit general, but the number three concern isn’t: “use of government power to reward or punish companies for political purposes.” Now, perhaps that sounds too 20^th century-style authoritarian to happen in the good old U-S-of-A. But consider the dilemmas that, say, a social media company has had to deal with in recent years: Do you kowtow to the side that is in power and wants you to clamp down on so-called “misinformation,” or do you prep for the opposition’s return to government and their stated concerns about political censorship? When both sides are implying they will use Uncle Sam’s regulatory might against you, how do you navigate it?

Alternatively, consider the shifting rhetoric American oil and gas firms have had to deal with: One government froze the Keystone XL pipeline. The next greenlit it. Four years later, it was dead. Politicians can’t seem to decide whether curbing oil and gas emissions or increasing supply to keep prices down is the greater concern. Elsewhere, some politicians strongly suggest banks should refuse to lend to politically disfavored companies and industries; others say banks should have to behave like public utilities and serve everyone who qualifies financially for a loan. And on and on it goes.

We aren’t passing judgment on any of these views, mind you. But when the policies are so far apart and government flips from one side to the other every few years, how do you navigate it? How do you plan? How can you measure the expected return on a long-term investment with any degree of confidence? Even if the federal government stays gridlocked, what about state and local governments looking to gain headlines and revenue by picking companies or industries to go after? Mission creep doesn’t get much notice, but it is real.

To see the impact, consider the aftermath of 2017’s Tax Cuts and Jobs Act. In addition to streamlining individual tax brackets, it lowered the corporate tax rate from 35% to 21% and simplified the taxation of international revenues. The goal: unleashing more business investment by reducing the incentive to keep overseas revenue stashed abroad and lowering the percentage Uncle Sam takes. But business investment growth rates since that took effect don’t look much different from before (notwithstanding dislocations from COVID lockdowns). Stocks did fine, and the economy grew, but we didn’t get a big tax cut-fueled boom.

We don’t find this too surprising. As we have long pointed out, corporate tax cuts and hikes don’t seem to have a pre-set impact on economic growth or stock market returns. Basic incentives would say corporate tax cuts should bring more investment, as the more you tax something the less of it you theoretically get. But the real world is a lot messier than theory, and we suspect this is the real world corporate leaders saw: A temporary tax cut passed along partisan lines, suggesting that when Congress eventually flipped to the other party, that cut could go away along partisan lines. A lower statutory rate couldn’t compensate for the longer-term uncertainty, which made it impossible to calculate the expected return on a 10- or 20-year project. We have long suspected that a broad bipartisan deal that cut the rate by fewer percentage points would have had a greater impact, as it would likely have had greater perceived staying power.

Taxes aren’t the only area of longer-term uncertainty. Think back to last year’s infrastructure bill and the so-called Inflation Reduction Act, both of which included a raft of grants and subsidies for various initiatives. Setting aside our opinion as to whether this is the most beneficial and efficient means of fostering innovation and growth, one would think the program would have companies champing at the bit to launch projects. But those subsidies and grants drip out over many years. Will a future Congress legislate them away? Or, if they stay, what if the White House changes hands in 2024, shifting government departments’ priorities and incentivizing companies to change their sales pitches? Will companies that launch projects favored by the current administration be in the next one’s good graces? And how does this uncertainty factor into the calculation of the costs and whether a project is worthwhile?

Now, we aren’t arguing this stops investment—just that uncertainty gums up the system to a degree. You can never get rid of that uncertainty in the long run, but gridlock helps mitigate it when it reigns. That is a plus now, with midterms delivering divided government through 2024 at least. It lets businesses know that even if the rules change over the next 5, 10 or 15 years, they are at least set for the next 2, making it relatively easier to navigate the regulatory landscape. Considering stocks look 3 – 30 months ahead, that means uncertainty should be lower within stocks’ field of vision—bullish.

Also? Government isn’t the only factor influencing investment decisions. It gets a lot of headlines, as you would expect in this politically obsessed world. But government isn’t that important in America, thankfully, as innovation happens outside the realm of subsidies and pet projects. Think about what is happening in the sustainable energy space these days. Politicians argue perpetually over wind, solar and electric vehicles—and whether or not government should fund them more or less. But away from that circus, companies worldwide are doing really cool things. One big outfit announced yesterday that they are launching a project to store CO2 emissions in mothballed undersea oil reserve facilities. Another announced it has cracked the formula for algae-based synthetic jet fuel and will start farming en masse with the aim of powering fleets in a decade. Ex-Formula 1 engineers have a startup whose specialty is sucking carbon emissions out of the air and rehydrating them into a net-zero, fully sustainable synthetic auto fuel. And then there is the rapid development of next-generation mini-modular nuclear reactors. And desalination plants. All of which could do wonders not just for the developed world, but for less-developed impoverished nations that would generally need to burn vast amounts of fuel to improve living standards. None of this is all that investible right now, but it is all really cool stuff happening largely outside the world of political lobbying and subsidies.

This goes a long way toward explaining why we think markets should thrive despite long-run political uncertainty. It is normal and natural for business leaders to be concerned about polarization and the risk of angering the wrong people. But it is also questionable how much these concerns factor into actual product development. Moreover, companies have been dealing with uncertainty in the form of Sarbanes-Oxley for over two decades now—and have still been able to invest and launch long-term projects. To a great degree, political wrangling has become part of the cost of doing business. That isn’t ideal. But we don’t live in an ideal world—and never have. Regardless, generating returns above those costs in the current politicized environment—which has existed for many years at this point—is entirely possible.