Political trends impacting business in 2020 and beyond
Editor’s note: In our annual review of forces facing U.S. businesses, we provide an update on political trends. We have made every effort to present a balanced, non-partisan report of current events. This post is divided into two sections: U.S. Politics and Global Politics.
America is at war with itself on a litany of issues. The 2020 election will likely hinge on a handful of them, including impeachment, trade policy, equality, healthcare and the broad-based economy. As of this writing, an impeachment trial of President Donald Trump is pending in the Senate. The impeachment will not be a focus of this article.
U.S. elections are often decided based on the momentum of the U.S. economy, and no issue is more important for Trump’s reelection campaign. U.S. GNP is expected to grow a moderate 2% in 2020, the eleventh year of the recovery and the longest in history.
Yet the global economy is fragile. Should Europe experience negative interest rates or other shock such as a meltdown of real estate in China, the world economy could slump. History offers little guidance as to the implications of a trade war recession that is driven primarily by a lack of supply.1
More trends affecting business in 2020
Feelings about the president aside, the divide between parties is evidence of a 30-year trend. Since Kennedy, the job approval ratings from the opposing party has been declining steadily. For example, Nixon had a 50% approval rating among Republicans and 20% by Democrats. Protectionism isn’t new either. According to an analysis conducted by the Free University of Berlin, financial crises such as that in 2008 have typically resulted in the election of “populist” leaders.
Our politics tend to diverge based on demographics. Female entrepreneurs have vastly different political priorities than their male counterparts. Female CEOs care most about the treatment of women in society and healthcare, which are fourth and sixth for men. Conversely, male CEOs care more about the economy, taxes and foreign affairs.2
Results of another poll of Inc 5000 CEOs are as follows:
- 57% thought abortion should be legal under some circumstances.
- 41% believe immigration to the U.S. should remain at its current level.
- 60% thought the U.S. government’s protection of the environment was “not enough.”
Policy, congress and regulations
The midterm elections yielded a wave of retirements and upsets. Dems seek to upend Trump’s deregulatory stance through oversight and investigations.3 In a recent poll of public company CEOs, cybersecurity, trade and data privacy were the issues that were mostly likely to be subject to new policy and reforms.
Dems are expected to defend Obama-era environmental and healthcare protections, especially in any revisions to the North American Free Trade Agreement (NAFTA). Pro-business Dems may lean toward a more centrist Democratic nominee such as Bloomberg or Buttigieg. Warren, for example, is calling for sweeping changes to the financial system which could dramatically increase compliance costs and cost of capital.4
The current makeup of Congress does not provide Trump the leverage to replace the Affordable Care Act (ACA), so he instead is utilizing regulatory measures to modify Medicare and control drug prices.
Technology companies are under significant pressure to adhere to privacy protections in Europe (covered in more detail below), and U.S. legislatures may take further action to reign them in, especially as it relates to content that could impact the 2020 elections. For the first time in many years, the U.S. may be bracing for anti-trust actions in industries where market power has consolidated.
Supporters point to the impact Trump has made in the courts, appointing over 150 judges (the most since President Bill Clinton). A number of important appellate courts such as the second and third circuits have flipped to a conservative majority.5 With the declining health of Ruth Bader Ginsburg, the prospect of Trump nominating a third Supreme Court judge could tilt the court for decades.
The Supreme Court has a number of notable cases on its docket in the next term. From immigration to LGBTQ and gun rights, several seminal cases will shape the debate on social issues. Should the impeachment trial take place, Chief Justice John Roberts would preside.
The economy, China and free trade
The recent announcement of a “phase-one” trade deal between the U.S. and China provides assurances of an additional $16 billion per year of Chinese imports of U.S. agriculture, but offers little to U.S. manufacturers. Trump appears to be positioning for a more substantive deal in 2020. The president has pointed to tariffs as a counter-balance to China’s manipulation of currency, reported theft of intellectual property and technology transfer. The jury is still out on which country is losing more in the trade war. Given the existing trade imbalance, tariffs have resulted in a loss of $14.5 billion in U.S. exports, while reducing Chinese imports by $53 billion. The president’s recent signing of a bill supporting Hong Kong protestors only muddies the waters further.
Trump has also called for revisions to NAFTA, which adds over $1 trillion to the economies of the U.S, Canada and Mexico annually. Of the 80 congressional districts that rely most heavily on NAFTA, 59 are red. The president has a lot riding on trade policy, which some observers believe could be a bargaining chip that he wagers right before the election.
The U.S.-China relationship is strained by competition on many fronts: AI, 5G, Hong Kong and control of the South China Sea where China continues to show its muscle. It feels as though some compromise before the election will provide a smokescreen for ongoing tension in a battle over global supremacy.
The FCC is coming down on Chinese businesses. U.S. companies are forbidden from using federal funds to procure from Huawei and ZTE, citing national security concerns. This could prove costly for firms who have already installed Chinese equipment in their networks.6
Inequality and wages
The chasm caused by class warfare is only growing. The facts would suggest that both sides distort the data to suit their arguments (confirmation bias):
In 1979, the top 1% of Americans earned 9% of the nation’s income.7 Today, they earn 20%. They also pay a disproportionate amount of federal taxes (37%). That means that the top 1% of wage earners pay more federal income taxes than the bottom 90% of wage earners.8 Warren and Sanders are proposing rather aggressive changes to marginal tax rates, capital gains and death taxes.
Yet the growing problem of wage inequality is undeniable. Of American workers, 28% of African American men have been to prison, four times that of white men.9 The prospects of the poor to improve their position is somewhat limited. In 1940, a child had a 90% chance of earning more than their parents. Today, they have a 50% chance.10
As the #MeToo movement has taken center stage over the last two years, oversight of equal pay has become a prominent corporate governance issue. Expect more rules similar to the Securities and Exchange Commission rule enacted in 2018 which requires that public companies disclose the ratio of CEO-to-employee pay. In some countries such as Iceland, certification of equal pay for women is required.
Among the most contentious issues in the presidential election will be the prospect of universal healthcare. Proponents such as Sanders and Warren have touted the possibility of “Medicare For All,” which could provide for gaps of coverage for everything from mental health to prenatal care. About two-thirds of Democratic presidential candidates support some form of the initiative, expected to cost upwards of $30 trillion over 10 years (Sanders’ plan).11
Attempts to arrest healthcare inflation have been unsuccessful. After years of double-digit premium increases (including a whopping 28% in 2018), premiums stabilized in 2019 (closer to 3%) and should be somewhat flat in 2020 as insurance companies are returning to federal exchanges.12
In a tight labor market, workers are not willing to pay more for healthcare. Employees are bearing the brunt in the form of higher deductibles and copays.13 The average deductible is up 53% from five years ago. At small companies, 42% of employees have deductibles over $2,000.
Concerns are rising about the safety of the U.S. pharmaceutical system. It is estimated that 90% of prescription drugs sold in the U.S. are “generic.” Eighty percent of active ingredients are manufactured in China and other countries with minimal controls and FDA inspections.
Perhaps more than any other issue, immigration policy has been a lightning rod for President Trump. The U.S. allows roughly one million immigrants every year, more than the UK, France and Italy combined.
In June, the Supreme Court is expected to rule on DACA (Deferred Action for Childhood Arrivals), which provides protections to over 700,000 immigrants. The outcome for “dreamers” will also shape the 2020 election, as Dems attempt to reach Latino voters. The Obama-era program has prevailed in lower courts.
About 12% of annual immigration is work-related. As only 7% of immigrants can come from any one nation, skilled workers trying to move to the U.S. face limitations. Trump has advocated for a “points-based” system.14
In 2019 the denial rate for H-1B visas spiked to about 25%, with a higher percentage of those going to those with advanced degrees. One study found that employers submitting a large number of H-1B applications (such as outsourcing, staffing and consulting firms) are experiencing denials at a higher rate – as much as 40%.15 A recent analysis by the Department of State suggests continued limitations on employment-based visas from China and India, especially EB-5 visas (for investors) which are opposed by the Trump administration.
While a litany of new labor laws will go into effect on January 1, the most sweeping changes will be new rules that will make 1.3 million Americans eligible for overtime pay under the Fair Labor Standards Act (FLSA). The final rule updates standard salary level to $35,568 per year for full-time workers and $107,432 for “highly compensated” workers. Employers will now be authorized to use incentive pay to account for up to 10% of compensation in the calculation.
Headed into 2020, the Department of Labor is focused on expanding apprenticeship programs, updating fluctuating workweek rules, changing tip sharing requirements, and reforming “joint employer” rules.
Europe and Brexit
The question of Irish unification is at the forefront of a divide within the UK as Northern Ireland, Scotland and Britain struggle to find an identity under the leadership of nationalist Boris Johnson.16 UK voters seem indifferent to keeping Scotland and Ireland in the fold, and the upcoming referendum is too close to call.
The UK’s struggle to find a graceful exit from the EU is taking a toll. The financial impact of Brexit is severe, as European trading partners are reducing trade with one another.
In Germany, Angela Merkel’s Christian Democratic Party is losing influence. Her named successor has struggled during a time when Merkel has experienced health issues.17 The Germans have an aversion to deficits, which reduces the likelihood of any financial stimulus.18 Similarly, French President Emmanuel Macron is facing civil unrest sparked by strikes there.
Negative interest rates could plague Europe in 2020.
Volatility in the Middle East
The balance of power is shifting in the Middle East.
Iran has been accused of an attempt to unsettle world markets through drone attacks on Saudi oil vessels. The attacks reduced the daily supply of oil more than any other event in history, including the Iraqi war and the invasion of Kuwait.19
When the world was dependent on the Middle East for oil, higher energy prices were contributors to several global recessions. Today, only about one third of global oil production ships through the Strait of Hormuz, providing cover for any volatility there.
Unlike prior shocks, the price of oil has remained relatively unchanged, as investors believe Iran and the U.S. are in a nuclear stalemate. Thus, Iran has lost economic leverage. The administration’s rollback of the Iran Nuclear Deal has resulted in sanctions impacting industries such as petrochemicals and gold.
Trump’s decision to step aside from a Turkish incursion of Syria by removing 1,000 U.S. troops was a watershed moment. Over 160,000 fled their homes and internment camps.20 Detractors point out that Russia and Iran may seed more influence in the region, now vacated by the U.S.
All of this makes for a muddy backdrop for Saudi Aramco (the state-controlled oil company) IPO. Expected to be the biggest IPO in history, Saudi Aramco reports roughly twice the net income of Apple. Saudi Arabia will host the G20 this year.
Unrest in Latin America
Latin America is mired in broken economies and civil unrest. Bolivia experienced “election irregularities.” Ecuador ended fuel subsidies, sparking controversy.
The U.S. government and other governments around the world deemed the election of Venezuela President Nicolás Maduro to be illegitimate and called for his ouster. During a time when its economy is expected to contract about 8% next year, 2020 could mark the end of Maduro’s reign, supported by Cuba and Russia.
While no other changes of power are expected in 2020, the region remains a potential flashpoint.21 Brazil is a bright spot in that inflation will moderate at 7% after a decade of decline and corruption.
Marginalization of these economies is widening the inequality gap. Lacking a true middle class, countries such as Mexico cannot rise to the level of economic prosperity of leading Western countries. Latin American economies are not strong trading partners with one another, further constraining the region’s growth.
The recent U.S. indictment of two Russian nationals is just the latest in a series of cyber-related accusations against Eastern European countries. With Russian hacking of U.S. elections in the forefront, U.S.-Russian tensions continue.
In 2020, the Nuclear Non-Proliferation treaty will be under review (which happens every five years).22 Some fear that the U.S., Russia and China could be bracing for a new arms race – this one including space drones and AI.
With Putin approaching the midpoint of his second term, moderating oil prices (the driver of the Russian economy) offer stability. Any public discontent will be stifled through government action.
European crackdown on tech
Given the uncertainty of Brexit, the legal frameworks that will oversee commerce in Europe are in flux. U.S. technology companies have drawn the ire of European regulators. The European Union’s General Data Protection Regulation (GDPR) has upped the ante for technology companies who must comply with complex privacy and data protection laws as well as defend against breaches and cyberattacks.23
The FAANG stocks and others are facing similar scrutiny at home, as a number of the House subcommittees on anti-trust review practices. Tech is actually unpopular with both parties, as Trump threatens action based on bias concerns and Warren threatens a breakup plan of Facebook, Amazon and Google into 13 pieces.24
It is hard to believe that our politics could be more complex or contentious, yet 2020 seems to be a watershed moment in the history of our country. We hope for a level of civility that will propel our economies and society forward.
1The World in 2020, The Economist
2Policy Priorities, Fast Company, October 2019
3From the 116th Congress to 2020, PwC
4The World in 2020, The Economist
5The Kiplinger Letter, Vol 96, No 37
6The Kiplinger Letter, Vol 96, No 44
7Naked Economics by Charles Wheelan
8The Tax Foundation
9Naked Economics by Charles Wheelan
10People, Power and Profits by Joseph Stiglitz
11New Study Confirms Medicare for All Will Cost a Fortune by Adriana Belmonte, Yahoo Finance
12The Kiplinger Letter, Vol 96, No 44
13The Kiplinger Letter, Vol 96, No 16
14Key Facts About U.S. Immigration Policies and Proposed Changes by Krogstad and Gonzalez-Barrera, Pew Research
15H-1B visa denial rates skyrocket under Trump by Ethan Baron, The Mercury News
16The End of the United Kingdom May Be Nearing, Bloomberg Businessweek, November 25, 2019
17The Known Unknowns, Bloomberg Businessweek, November 25, 2019
18The World in 2020, The Economist
19Now What, The Economist, September 21, 2019
20Who can trust Trump’s America, The Economist, October 9, 2019
21Latin America splits at the seams, Bloomberg Businessweek, November 25, 2019
22The World in 2020, The Economist
2310 Technology Trends that Can Impact Your Business in 2020, Mobile App Daily
24If Warren Had Her Way, Bloomberg Businessweek, November 25, 2019