Think 2018 Elections Polarized? Look out to 2040: How Demographics Impacts Elections
Two of the past four presidential elections were settled in the electoral college, leading to wins of two candidates who did not collect the majority of votes overall but did win the greater number of state votes. Thus, a win of, say, 10,000 votes in Ohio leads to more state electoral college votes than a win of 50,000 votes in New Hampshire. New Hampshire’s winner has a more substantial plurality of votes, but Ohio has more votes in the Electoral College. Under what is typically a state by state winner take all system, the candidate who wins Ohio would get more Electoral College votes than the one who won New Hampshire, even if the Ohio winner received fewer ballot votes.
This trend is set to accelerate. By 2040 or so, 70 percent of the country will live in fifteen states, as calculated by David Birdsell, a Baruch College political scientist. By implication, the remaining 30 percent will live in the remaining 35 states, meaning that 30 senators will represent the fifteen states with a majority of the population, while the 30 percent minority will elect 70 senators.
The assumption is that the majority states will become more urban concerning where people live. Whether this also happens in the minority states is less easy to predict. Historically, urban areas tend to be more liberal leaning, with rural areas more conservative. While political choice is a right to all in this country, the potential aggregate effect based on past trends will be for the majority states by representation to possibly over-rule the majority states regarding population.
In a way, when the founding fathers formed the government, this was and was not what they envisioned. At that time, the smaller states lived in fear of being bulldozed over by the larger states as regards to political representation. So the founders created the Senate, which would have two representatives from each state, regardless of size, and the House of Representatives, which would be allocated by population. At the time of its formation, the disparity in population was not as excessive as now. Smaller states tended to be closer to the coast and had a relative population closer to larger states, mainly because the interior of the country were not heavily populated yet. The Electoral College was to ensure further the representation of smaller states.
As the country grew, the addition of more states increased the size of the Senate, though the House districts were the same in number but becoming larger considering the size of the population represented. However, the country has not added a state since 1959, so the effects of the recent demographic shifts have become more pronounced.
One school of thought is to eliminate the Electoral College and rely on the popular vote to determine the presidency. The problem is, to do this would act against the interest of the areas that benefit from it, and their consent would be needed to effect such a change. Another thought is to eliminate the Senate and have the House be the only legislative branch. Again, it is fanciful to expect anyone to agree to concede to something that gives them so much power. Besides, the issue with the House is that the state governments get to draw up the house districts, which tilts representation to the party controlling the state government.
This practice is called “gerrymandering” after Massachusetts Governor Elbridge Gerry, who in 1812 drew a district in his state that was felt to favor his party. It looked to others like a salamander; thus to draw up a map which favored your side became known as gerrymandering. District boundaries are redrawn every ten years to reflect the census of the country. States are assigned house seats proportionate to their share of the country’s total population, and in most cases, it is up to the state legislators to re-draw the boundaries. The stated goal is to get each house district to reflect the proportionate number of citizens, while the legislator’s goal is to make sure as many districts have such a large number of their party voters as to make them “safe” or not subject to change. With the advent of computer data, house district boundaries have become increasingly convoluted.
This practice of gerrymandering is cited, along with a lack of term limits, as the chief reasons for the historical favoring of incumbents over challengers. There are other advantages of incumbency, from the dispensing of political favors to franking (free postage), but gerrymandering is considered the most relevant when it comes to setting up the districts and legislative reception of the electorate. In fact, Iowa has shown the nation what it is like to have non-political redistricting. In Iowa, all districts have to be drawn to look like squares or rectangles, with the exception that all boundaries have to follow the country lines. There can be no split counties. The result for Iowa and all other states, should they choose to pursue the same policy, can be seen on https://projects.fivethirtyeight.com.
Politics has always been a conflict between the parties in and out of power, the self-interest of the officeholder, and the higher calling of the office. The vacillation between these last two disparate goals is what makes politics what it is. Some people gravitate to the calling, some to the financial enrichment. History is kindest to those who take their oath of office and their constituents seriously. Others wind up at best cynical, and at worst felons.
Economic activity continues apace. Fueled by the tax cuts for corporations and individuals, corporate profits are expected to be up 17.12 percent in 2018, before settling back to 7 percent in 2019 and 4 percent in 2020.
The U.S. economy has been something of an island of stability when compared to the rest of the world outside of Europe. While tariffs on imported goods are giving some companies fits, these companies often do not have the mechanism to pass on the rising costs of materials and transportation; this will change as producers become more adept at preparing for what looks to become a more inflationary environment.
Of special note are the firms that compete with foreign goods using imported and marked up raw materials. The current tariffs placed on raw materials and intermediate goods are unique; tariffs usually target only finished products. The tariffs help the raw steel and aluminum producers while driving some of the smaller companies out of business that use either or both materials in their production.
The escalating deficit is expected to top $1 trillion next year and has not yet made itself entirely felt in the credit markets. A large part of this is due to the turmoil in foreign countries like Turkey and Venezuela. As the U.S. is figured to be a “safe haven” for investments, foreign money is converted to dollars and deposited in U.S. institutions, who in turn purchase government notes and bonds with the proceeds.
How long the period of stability will last is anyone’s guess, but Jerome Powell, the current head of the Federal Reserve, has shown no desire to modify his pace of two more rate increases in 2018, and at least three in 2019. Couple this with the running off of government investments in its portfolio of securities, which has also not slowed, would portend to an increase in interest rates sooner rather than later.
Inflation is bubbling just below the surface. Some companies have forgotten how to monitor their costs in an inflationary environment, and have gotten hit with smaller margins as a result. Other companies, especially those who have experience working in inflationary environments in other parts of the world, have been more aggressive in raising prices. Expect rising inflation, especially as long as the tariff war continues.
The Stock Market
Stocks rock along, propelled by the tax cut and the ensuing economic growth, as well as interest rate suppression caused by foreign money looking for a safe haven in the United States.
While the U.S. has trade wars going on with several countries, none is as pivotal as China. China holds more than a trillion dollars of government debt, as the result of years of trade deficits. The conventional wisdom is that China cannot dump its government debt without bringing injury to itself in the form of losses on the bonds sold.
An easier way for China to drive U.S. interest rates higher will just be not to buy any additional debt. By sitting on dollars, China will cause interest rates to drift up as a buyer of $250 billion of government bonds per year disappears. There will be pressure on bond prices, but China intends to hold to maturity, so they should not be affected. The United States, in contrast, confronted with the reality of rising interest rates that, lacking China as a buyer, U.S. debt cannot be sold for anything like current interest rates. The effect on both the bond and stock markets will be telling.
Warren M. Barnett, CFA
August 21, 2018
Warren Barnett is the founder and President, and Portfolio Manager for Barnett & Company. He was associated with the investment banking firm of Kidder, Peabody & Company and the investment counseling firm of Davidge & Company in Washington before returning to Chattanooga to accept a position in the trust department of a local bank. Perceiving the local need for the type of firms with which he was associated in Washington, he established Barnett & Company in 1983. He obtained the Chartered Financial Analyst professional designation from the Institute of Chartered Financial Analysts, Charlottesville, Virginia in 1986. Mr. Barnett graduated from The McCallie School in Chattanooga. He received his Bachelor of Science degree in Accounting from the University of Tennessee at Knoxville and his Master of Business Administration degree in Finance from the Owen School of Management at Vanderbilt University.
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