Both parties are fighting over how to slice the pie. But growth and technology decide its size, and Washington, as usual, is late.
In our view, the most consequential contest on November 3 is fundamentally not between the two major U.S. political parties, but rather, between the ideologies inside each of them: between those who want to grow the economy and those who just want to re-slice what’s already there.
Across the pond, two days before U.S. voters go to the polls, several hundred antique cars built before 1905 will leave Hyde Park for Brighton to mark 130 years since the Emancipation Run. That re-enactment/celebration (not really a race) has been going on since 1927, and originally celebrated Parliament’s raising the speed limit from 4 to 14 miles an hour and ending the rule that a man had to walk ahead of every car with a red flag. That rule dated back to the 1865 “Red Flag Act,” originally written for steam traction engines. The first motor cars simply inherited this rule; regulation lagged behind technology for a long, painful period.
Politics does catch up with technology… eventually. But the waiting is expensive, particularly in terms of lost growth opportunities, when regulation fails to support — or actively dampens — innovation. This year, the “re-slicer” brigade has some extra ammunition: an oil shock that has kept gasoline and diesel expensive for months, and energy price inflation generally has become a pain-point for consumers across the U.S.
Both parties are campaigning on “affordability.” Both parties are pointing fingers in the direction of the fastest growing segment of the economy’s energy demands as part of the problem.
The Pie: Slice It or Grow It?
There are two platforms to present to voters that can make them feel richer. One grows the economy: rules that make it cheaper to build, invest, and hire, such as letting companies write off new equipment immediately, giving faster permits, greenlighting more power plants and housing, and making clear rules for new technology. The other re-slices the economy: higher taxes at the top (although they always seem to trickle quite a ways down from the top), caps on prices, rent freezes, rules that punish ownership, regulations designed to keep a lid on “excess” prosperity… and the evergreen idea of sending the bill to someone else, often someone in the future.
Arthur Okun, Lyndon Johnson’s chief economist and no one’s idea of a free-market zealot, likened redistribution to carrying water in a leaky bucket. Some always spills along the way, through administrative cost, reduced savings and investment, and blunted incentives (we’d add capital flight). Growth, on the other hand, may not spread evenly, but it has no such leak, and it compounds. At 2% real growth per year, you can achieve a doubling of living standards in about 35 years. At 1% real growth, it would take about 70 years to do the same. Going even further, that 2% real growth, if allowed to compound, can triple living standards in 56 years, and quadruple living standards in the same 70 years it takes a 1% rate just to double it. Growth-limiting policies equal lost generations.
This letter is general commentary — the wide-angle view. It is not a portfolio. What we do for the families we work with is the opposite of “wide-angle”: we make portfolios built around one household’s circumstances, taxes, timelines, and appetite for exactly the kind of volatility described above. We keep that roster of clients deliberately small, because that sort of attention doesn’t scale. If you’d like to talk about what it would look like for you, contact us; we will make the time.
Output Is Not the Problem
Real GDP grew at a 2.2% annualized rate in the second quarter, and the Atlanta Fed’s tracking model puts the third quarter near 3.6% annualized (granted, that tracking measure has a wide error band around it). Prices are the problem. A broad gauge of what Americans pay increased at a 5.6% annualized rate in the second quarter, and electricity in September cost 4.4% more than a year earlier. It is when prices go up, and the pie feels smaller, that voters are more vulnerable to the re-slicer agenda.
As it happens, both parties are handing out knives to carve up economic spoils. On the left, “democratic socialists” unseated two more moderate New York congressmen in June primaries. Californians will be voting on a “one-time” (permit us a hearty LOL) 5% tax on the net worth of the state’s billionaires. On the right, the President has called for a 10% cap on credit-card interest rates, borrowing an idea from Senators Bernie Sanders and Josh Hawley. Additionally, the Federal Government has decided to take equity stakes in 31 companies by the Cato Institute’s count, a tool the country once kept for emergencies like 2008 (and that for decades would have been considered unthinkable by politicians in both parties).
We also see both political parties have politicians taking more pragmatic, pro-growth positions within them. Some policies that encourage growth have received bipartisan backing such as the tax law change that made immediate write-offs for equipment permanent. And then there is California’s Governor Newsom. While not exactly a pro-growth hero, he opposes the billionaire tax. Perhaps this is just smart politicking, considering where his Presidential campaign war-chest will get a lion’s share of its gold. Newsom would rather tax billionaires nationally, which we think is equally foolish, but he makes a correct point: “Wealth is movable, and it shops for the state with the lowest taxes.”
Redistribution divides this year’s pie; growth decides the size in future years.
Washington’s lateness to intelligent and effective regulation seems to be baked in to its processes. Legislators write rules for the technology they understand, which is usually the previous one.
Why Follow the Red Flag?
Artificial intelligence is one case. Congress has twice declined to replace state AI laws with a single national standard, the White House asked again in March, and a bipartisan House draft that would pause state rules on how AI models are built had not been formally introduced as of midsummer. Nearly four years after ChatGPT, America has a patchwork of state rules and none from Congress.
The power grid is another case. Data centers have (arguably) driven up electricity demand, power bills have followed, and some candidates in both parties are now campaigning against the buildings themselves; one Republican Senate candidate has proposed a one-year moratorium. Sound familiar? A moratorium is a man with a red flag.
Crypto showcases the whole cycle. For years Washington regulated it by lawsuit rather than by rule. Then last year’s GENIUS Act wrote real rules for stablecoins —digital dollars redeemable one-for-one — and the market answered: stablecoin supply stood near $308 billion in August, up 14% from a year earlier and almost entirely dollar-denominated (please note that there is a geopolitical dimension here). But the sequel to GENIUS has stalled. In September the Senate declined even to open debate on the CLARITY Act, the rulebook for everything else, after fights over banks’ push to keep stablecoin issuers from paying yield, and over ethics limits on officials’ crypto interests, the President’s and his family’s included. “Clarity,” once again, will be arriving way later than the transformative technology itself, in the meantime leaving innovators in uncharted waters without a compass.
There’s progress, too, though. An Energy Department pilot program brought four advanced test reactors to criticality, a self-sustaining chain reaction that does not yet produce electricity, about a year after it opened for applications, beating its own goal. In June, Federal regulators ordered grid operators to revise or justify their rules for connecting data centers, and both parties are converging on the sensible answer to power bills: make the biggest new users pay their own way or build their own plants. The common thread is rule-writers who understand how things get built and who consult the people building them. That is a case for business experience in government, not for government as shareholder. As Cato points out, a Federal stake in one company quietly tells investors that every unbacked rival is the riskier bet. We believe the economy needs more lawmakers who have taken business risk, built something, met a payroll… and fewer career academics, or politicians who are more accomplished at cashing taxpayer-funded checks than anything else.
Building Portfolios for More Growth, While Also Being Prepared for More Redistribution
It’s highly uncertain, of course, but current polls point toward divided government. Democrats lead the generic ballot, which asks voters which party they want running Congress, by about nine points in the RealClearPolitics average. A split Congress makes large Federal moves in either direction unlikely and pushes the action toward statehouses, regulators, and courts. Markets have generally coped: the S&P 500 has risen in the 12-month period after every midterm since 1946.
Re-slicing first bites in specific places. Credit card issuers’ shares fell in January when the rate cap was floated. Regulated utilities with heavy household exposure face pressure to hold rates down wherever power bills are a campaign issue. Healthcare is another specific area where there is no shortage of pols who favor slicing the pie and carrying red flags… over encouraging the industry to innovate and grow supply.
It is not just industries. Here in California, Proposition 3 would make permanent the higher income-tax rates voters first approved in 2012, which now apply above roughly $361,000 of income for single filers and $721,000 for joint filers and would otherwise expire in 2031. The billionaire tax reaches far fewer people, but the Legislative Analyst’s Office expects it to raise tens of billions up front and then to cut income-tax receipts by hundreds of millions a year as taxpayers “adjust” (i.e., flee)… in a state where the top 1% already pays nearly half the income tax. It will be interesting to see how this “bites” if it passes.
Regardless of the November 3 result, we see continued opportunity in areas where government rules have yet to be codified and demand continues unabated: AI-driven innovations, electrical power, grid equipment and on-site generation for the largest users, nuclear, and the dollar-stablecoin rails the GENIUS Act made legal (meanwhile, the rest of crypto still awaits its rulebook).
We are aware of “political beta.” “Beta” measures how much a stock swings with the market; “political beta” then might be how much it swings with Washington, and it runs highest where company fortunes depend on a government stake, an exemption, or a tariff. That exposure does not appear on a balance sheet, can sometimes only be gleaned from a conference call, and can reverse with one election or one ruling. Stocks like that should be held only with a very attentive attitude. Perhaps it is best to own businesses that need nothing from Washington but clear rules, but to be wary of those that need a favor or are living on entrenched political connections.
Thanks for listening; we welcome your calls and questions.
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