The Only Way Big Business Turns Against the Tea Party

October 24, 2013Danny Vinik 1 Comment

The Washington Post had a terrific story yesterday that examines which companies funded the campaigns of Ted Cruz and other Republicans who supported shutting down the government and fueled the debt ceiling brinksmanship. It turns out that a lot of major banks and firms gave big to those candidates:

The American Bankers Association gave more money over the past two election cycles to GOP lawmakers who in effect voted to allow the United States to default on its debt than those who voted against that scenario.

The ABA contributed $2.2 million to lawmakers who ultimately ignored the group’s warnings

The story reveals that Ted Cruz and other lawmakers who voted against the final debt ceiling deal received substantial donations from financial services companies. Yet, big business was adamant that the debt ceiling had to be raised. The Chamber of Commerce urged lawmakers to vote yes on the final deal, even making it a “key vote.” A number of CEOs took to the media to warn of the consequences of breaching the debt ceiling. They had no interest in messing around with it. Now that the business community has seen the willingness of Tea Party congressmen to cause an international financial crisis, will they begin funding the campaigns of moderate Republicans or even Democrats? It’s unlikely.

Big business shouldn’t be surprised by the debt ceiling brinkmanship. Many candidates ran on a commitment not to raise the debt limit. No one was surprised that Cruz and Tea Party conservatives were willing to let us default. Why did the Chamber and other large companies support these candidates if they knew that they were willing to cause an international financial crisis? The answer is that there are many other issues that big business cares about. They want fewer regulations and lower taxes, both policies that Republicans favor. On organized labor, big business and the Republican party have never been far apart.

As Alex Pareene notes, where the Republican Party and business community actually differ is on tactics, not policy (except immigration). The Chamber wants Obamacare repealed just like the Tea Party does. They differ on how to accomplish that. That’s why big business is so supportive of the Republican Party, Tea Partier or not.

The Tea Party has also proven to be a terrific vehicle for the business community to advance its agenda. It provides grassroots organizing and a vocal base that forces lawmakers to stick to an ultra-conservative platform. Then, the lobbyists come in and use that anger to push for ideas popular amongst big business. Look at how the debt ceiling deal unfolded. The policy concession the Republicans were pushing for on Obamacare was the repeal of the medical device tax, a huge win for that industry. Remember when Congress was fighting over the sequester and its immediate harmful effects? The Tea Party jumped on the flight delays as an area where the Obama administration was intentionally inconveniencing travellers to draw attention to sequestration. Eventually, Congress approved a bill to give the Department of Transportation more flexibility with its funding to alleviate the delays. Who would benefit most from that relief? Business travellers jetting around the country each week. It all began with Tea Party anger.

In addition, the Tea Party has dragged the policy conversation to the right. Despite its harm to the economy, spending cuts have been a prime goal of the Tea Party and big business. The Chamber knows that if it the government doesn’t cut spending significantly, it will be forced to raise taxes on the rich. Even if the austerity hurts the economy in the short-term, it’s an acceptable cost in order to keep taxes low in the long-term. More than any other constituency, the Tea Party is responsible for the laser-like focus on deficit reduction. The members most committed to cutting spending are the ones who are most conservative.

This gives Republicans little reason to challenge or turn against the Tea Party. But this alliance is not unbreakable. If the Tea Party begins pursuing strategies that actively harm and set back the goals of big business, it could cause them to rethink their support of conservative candidates. The main way this happens is if the Tea Party’s tactics endanger the GOP’s majority in the House. The government shutdown and debt ceiling brinksmanship have sent approval of the Republican Party to historic lows. Yet, thanks to gerrymandering, Republican districts are mostly safe. It’s still highly unlikely that Democrats take back the House. But if that becomes more likely, big business could start pushing for more mainstream Republican candidates, especially in competitive districts where a Tea Partier faces a moderate challenger in the primary,

It’s tough to imagine a situation where the Tea Party’s tactics become so extreme so as to directly put the business community’s goals at risk. Is there anything the Tea Party could do that would result in higher taxes or increased regulation? The debt ceiling is the one area where the Tea Party could put the economy at risk, but Boehner was never going to allow us to default. It wasn’t going to happen and big business knew it. They weren’t scared of Cruz and Co.’s tactics, because they always knew that Boehner was bluffing. Indeed, the only risk the business community sees in the Tea Party is that its radical stances could alienate so much of the electorate that Democrats take back the House and enact a string of liberal policies. Until that becomes a real possibility though, don’t expect big business to break off from the Tea Party. It’s way too valuable a partnership for them.

Forward Guidance Works!

October 23, 2013Danny Vinik 1 Comment

I’ve argued repeatedly that the Fed does not have a communications problem. The problem lies with journalists and the market, which interpreted Ben Bernanke’s comments in June to mean that the Fed was set to taper no matter what. This interpretation caused interest rates on mortgages to rise in anticipation of the taper. But rising mortgage rates hurt the housing sector and reduce economic growth. The Fed took that into account along with some other below-average data and decided to forego tapering. Many journalists argued that the Fed miscommunicated its strategy in June, but that wasn’t the case. By misunderstanding the Fed, the market priced in a Septaper which forced the Fed to delay it.

This should have given Bernanke more credibility as Fed chairman. Instead of reducing the Fed’s bond buying without looking at the data, the Fed responded to weaker growth by delaying the taper. It should have been a sign to the market that the Fed really is data-dependent. Instead, most financial commentators argued that it was the Fed’s communication strategy that was at fault.

A month later and now there are signs that the message actually sunk in. Here’s Neil Irwin:

This time five weeks ago, markets were ready and waiting for the Federal Reserve to begin its “taper,” the beginning of the end of its program of pumping billions of dollars into the economy by buying bonds.

Not only did Fed leaders elect to sit on their hands at that meeting; now the smart money thinks they won’t even start to slow their bond buying until this coming spring! That’s all the more remarkable given that there has been no radical shift in the tenor of economic data, just a series of mild disappointments, of which the September jobs report issued Tuesday morning was the latest example.

The market is listening to the data and basing their expectations of Fed policy on it! That’s exactly what Bernanke set out to accomplish with forward guidance. He wanted the market to have a good understanding of future Fed actions, but to do so, he had to outline a plan for how the Fed would act in the future. There was no set timeline for the taper given the uncertainty in the economy. That’s what he was saying in June, but he was also saying that if the economy continued growing at a moderate pace (which it hasn’t been), then the Fed would begin to taper its asset purchases. That was the baseline investors should use to predict Fed policy. If the data comes in above average, expect a greater reduction in bond purchases. If it comes in below average, expect those purchases continue for a longer period.

As Irwin writes, the (limited) economic data hasn’t been that much worse in the past month, but the expectations of Fed commentators have changed drastically. Those expectations are now aligned with the Fed’s intentions.

This is how forward guidance works. I argued a little while ago that the real test of forward guidance would be how the market would react to underwhelming economic data. Here’s what I wrote:

If economic data continues to come in below expectations, the Fed will likely delay tapering yet again. Will the market realize that or will it once again blindly assume that the taper is coming? If the market does blindly assume that the Fed won’t adjust its policy, then the Fed must realize that forward guidance doesn’t work. Bernanke could not have made it more clear, both in his press conference and now by the action (or lack thereof) the Fed has taken, that the central bank is data-dependent. If the market has not learned by the next FOMC meeting, it’s never going to and the Fed must admit defeat.

Look what’s happened! Journalists and investors everywhere are pushing off when they expect the Fed to taper. This is the whole point of forward guidance. After the first government shutdown in 17 years, maybe it seems obvious that the market should assume that the Fed will keep up the pace of asset purchases into early next year (at least). But part of it is that Bernanke and the Fed laid out a roadmap for investors to follow depending on the underlying strength of the economy.

In that previous post, I lamented that forward guidance would be a failure if the market still expected a taper despite continued underwhelming economic data. Investors and journalists were never going to listen. But the opposite is true too. They are all reacting to the data and adjusting their expectations of Fed policy accordingly. That’s a new level of Fed credibility that didn’t exist a month ago and it’s a direct result of the Fed’s decision not to taper. It gave investors confidence in the future path of Fed policy.

That means forward guidance has been a major success.

Obamacare and Part-Time Work

October 23, 2013Danny Vinik Leave a comment

When the jobs report came out yesterday, there was immediately a push back to the conservative argument that Obamacare is causing companies to cut their employees’ hours back to avoid the employer mandate penalty. The employer mandate requires employers with more than 50 workers to offer affordable health insurance to all full-time employees (defined as those working 30 or more hours a week). If they don’t do so, the firms must pay a fine of $2,000 per employee.

Many conservatives predicted that employers would cut back hours to get under that threshold. Liberals are concerned about that as well. But a meme popped up about a month ago that Obamacare was already cutting back worker hours. This never made any sense from the start. The Obama administration delayed the employer mandate until 2015. If employers were cutting back hours already, they’re doing so more than a year in advance. Why would they be doing that? It never added up.

Well, it’s abundantly clear now that employers aren’t cutting back on full-time workers. Here’s AEI’s Jim Pethokoukis:

Obamacare is not causing a surge in part-time employment at the expense of full-time jobs. Last month, according to the volatile household survey, full time employment was up 691,000, part-time employment down 594,000. So since last December, the economy has created about 1 million full-time jobs vs. a loss of 100,000 part-time jobs. From The Wall Street Journal: ”The uptick in part-time employment earlier this year now looks like a statistical blip: Part-time employment fell in late 2012, then rebounded in early 2013, and has now fallen for two consecutive months.”

That puts that rumor to bed. But don’t take this to mean that Obamacare won’t cause workers to cut back on employee hours. There’s a pretty good chance that it actually will have those harmful effects. But we won’t see those effects until a year from now when the threat of the employer mandate is closer.

It’s good that this job report disproved the idea that employers were cutting back worker hours because of Obamacare. But this shouldn’t overshadow the fact that the employer mandate isn’t good policy. We may not see the harmful effects of it now, but we likely will in the future.