First Republic Fall Forum Session 1: U.S. Domestic and Tax Policy Briefing

First Republic Bank
September 21, 2020

Watch part one of our series of conversations designed to explore the geopolitical landscape, U.S. presidential election implications, and key tax and investment considerations. Brought to you in partnership with Eurasia Group, one of the world’s leading global political risk research and consulting firms.

Read below for a full transcript of the conversation. 

Chris Wolfe - Good afternoon everybody, and welcome. I'm Chris Wolfe, the Chief Investment Officer for First Republic's Private Wealth Management Business. It's my privilege and pleasure on behalf of First Republic to welcome you here today. We're delighted to partner with Eurasia Group on today's program, which is the first of a series of Zoom calls meant to help investors better understand policy and markets both before and after the election. If you'd like to join some of the other upcoming Zoom calls, please visit our website at www.firstrepublic.com. Now, political scientist Ian Bremmer, who I think many on this call know, founded Eurasia Group more than 20 years ago to help business decision makers and investors better understand how politics and policy move markets. And we're joined here today with Jon Lieber, who I'll talk to in just a moment, who leads the coverage for Eurasia Group of both political and policy developments in Washington. Jon has an extensive background in government. Including as an economist for the House Ways and Means Committee. He was a director at the National Economic Council at the White House, and is senior economic policy advisor to Senate Majority Leader Mitch McConnell. In his roles Jon's advised senior elected officials and staff on a wide range of policy areas. It's going to be good for our conversation today. He also helped to negotiate multiple spending and tax packages during Barack Obama's administration, and has shepherd several major trade agreements through Congress. This is Jon's second stint at Eurasia, and we're lucky to have him here today. So, as a reminder, we will have a live Q&A session at the end of today's session. Jon and I will go for about 30 minutes or so. And if you'd like to ask a question during the live session, please submit it through the Q&A button. So with that, Jon, welcome.

Jon Lieber - Great, thanks so much, Chris, great to be here.

Chris - Yeah, so let's start. I think the thing that's most on investor's mind maybe is the elephant in the room, which is the election. We hear about it every day, we see it every day. Everything is critical. If everything is critical, is nothing critical? What's most important? How do you think about things like swing states? Is this really a referendum? I could go on with all the questions that I think crop up based on the news flow here. But, in your view, having kind of been on the inside, what's really important and what's going on here?

Jon - There's obviously endless amounts of coverage of the election and lots of analysis from different people and different ways of looking at it. The way that we take, and we approach elections generally, is we take a structural group, and we try to look at least three different ways of cutting the data across countries. And we've partnered with each of those public affairs in this election cycle. They have, basically, a three part model that we've been using. The first looks at the incumbent's approval rating. And President Trump actually does pretty well here. His approval's surprisingly resilient. He's basically back where he was pre-pandemic. He's moved from a tight range between 40 and 45% approval his entire presidency. Half the country's going to hate this guy no matter what he does, 40% are going to love him no matter what he does, and then there's a little dam in the middle that he can pick up. And right now he's right at 43%, which is where he's basically been in the entire presidency. The second thing to look at on a horse race polls, and this obviously gets the most coverage in the media. It gets the most coverage of newspapers and everywhere else. And Biden's doing really well here. He's got between a seven and nine point advantage nationally. Most observers think Biden's likely to win the national vote, but of course it's the swing states that really matter. And there aren't that many swing states that are actually in play in this cycle. We're looking at Pennsylvania, Wisconsin, and Michigan, which were three states where Donald Trump surprised in 2016. And then Florida, Arizona, and North Carolina are probably the closest states in this election cycle. The ones that we pay the most attention to. Again, Biden has leads there. And then the final thing to look at is the key issue mapping, who's doing better on the key issue that matters to voters? And the two key issues, depending on which poll you're looking at, one's the coronavirus. And Biden's got a huge advantage here. Because the President, the U.S. has not had a good response to the coronavirus. And you can argue that maybe it's done better in some things and worse in other things, but just compared to other developed countries around the globe, the U.S. response has not been good. And the polls show that Biden's got a big lead here. And then there's the economy, where Trump has an advantage that has shrunk over the last couple of months. So on balance, you know, I think Biden looks pretty good right now. I'd rather be him than Trump. Normally, you'd rather be the incumbent in an election cycle, but, with the pandemic with 200,000 dead Americans, 8 1/2% unemployment, that's the kind of environment where an incumbent's going to lose.

Chris - So, that's a good beginning point, I think, to understand what's going on with the election. We're still 50 some odd days away at this point, or just about 50 days, a little less than that. I think as people get closer, they're going to want to hone in on a lot of the different issues. Well, you highlighted two, the economy, as well as the coronavirus. Are there other things at stake here when you think about, say for example, the lobbying that goes on in Congress, the corporate tax breaks that have been passed, and kind of the profit function that's helped to support the stock market. Are those things as important, or is it really, when you boil it down, just those two big things for the voters?

Jon - This is not an election about policy. I bet most voters, they know there's a pretty big difference between the Republicans and Democrats, but that's not what this election's about. That is not what 2016 was about. I guess I should say with a couple of caveats, like, Trump ran on a really unique policy platform on both trade and immigration. He basically ran as a Democrat on trade and he ran on a really aggressive anti-immigrant policy, which resonated with the Republican base, and previous Republican politicians had been unwilling to go that far. And obviously, he's going to reiterate those same policies again in this election cycle. Tax policy, other areas, there's a big policy discontinuity between Trump and Biden that's likely to happen in 2021, depending on who wins. But that's not, I think what most people are voting on. The big things here are, like I said, the coronavirus and the economy, how much you like Trump. One of the advantage Biden has in this election is that Trump is historically unpopular, he's been historically unpopular since he started his campaign, and he’s been a historically unpopular president. Hillary Clinton was the second least popular person to ever run for president after Donald Trump, and she lost. Biden is far more popular than she was. He doesn't come to this with Clinton's baggage. So, to the extent this is a referendum on kind of the characters of the two people, Trump starts off in a deficit there.

Chris - So if we take that thinking a little bit further, there's usually a question that happens right behind how do you see the election, which is, what would a contested election look like in your view? And how do you think about, kind of, the U.S. having to go through that? There are some rules, and some laws and procedures in place, but the reality is a contested election's not something I think most people are familiar with.

Jon - Yeah, what's unique about this election relative to prior normal years, is the pandemic. And the pandemic's expected to result in a significant uptake in vote by mail. So in 2016, about a quarter of the ballots cast were done by mail. In this election cycle, people are telling pollsters that probably maybe 50 or 60% of the country tends to cast their vote by mail. Another huge section of the country tends to cast their vote in person, early, which is also unique. But it's the vote by mail that really exposed some of the vulnerabilities in our election system. And the reason is, the rejection rates on mail ballots tend to be a lot higher. In 2016 the rejection rate for in person ballots was negligible, not really worth counting. On mail ballots, it was 1.4%. So, several 100,000 votes were rejected across the country because vote by mail is harder, it's harder to do. You know, you go into the ballot box in person, they see you, they check your name, they know who you are, you vote, and everything's good. One of the biggest hurdles with vote by mail is signature matching. So you get your ballot, you sign it on the outside, and it goes to the election authorities. They then compare the signature they have on file to your signature, and if they don't match, your ballot gets tossed out. So, that's going to be, I think, a key vector for some of the confusion you'd expect to see after Election Day. I think there's maybe a 25% chance we know who the winner is on Election Day. If Biden wins Florida and they call it on Election Day, it's over, basically, over for Trump at that point. But, we're not going to know who won Pennsylvania. We're not going to know who won Michigan. We're not going to know Wisconsin. These three states have far less experience with vote by mail than say Arizona or Florida, where 60 to 80% of the population regularly votes by mail. They're going to have a surge of new voters, people who are voting by mail for the first time. And it's going to overwhelm the state's capacity to count all those ballots quickly. The other wrinkle is that in many of these states, excuse me, excuse me.

Chris - It's okay.

Jon - The other wrinkle is that in a state like Pennsylvania, they're not allowed to count the votes until Election Day. So, even if they get all the votes, even though everything goes really well with vote by mail, the systems aren't overrun, they simply can't start counting them until election day. So you're probably not going to know the result in those states until later in the week. I think probably, we know who the winner is within five to 10 days after election night. But if we don't, then I think things get really interesting because that's when, if we don't, it'll be because there's disputes over individual mailed ballots. And those disputes, you know, a Republican lawyer will sit down, a Democratic lawyer will sit down, and they'll try to adjudicate which ballots should be accepted and which ballots will be thrown out. And that process could take some time. That's what happened in the 2000 election, Bush V. Gore, where there was a disagreement about a really confusing ballot in Broward County and Miami Dade County in Florida that led to litigation that went all the way to the Supreme Court. And that's, I think, the real threat here, of some of the confusion that could happen after Election Day.

Chris - Wow. So, if you had to pin it, and I realize this can be a difficult question, maybe it's a range, the probability that we know the election winner on election night, in your view, versus, say, within a two week period post the election night?

Jon - I think on election night, 20, 25% chance we know who the winner is. And the reason we would know is because Biden's blowing out Trump in a place like Florida. And then, within two weeks.

Chris - I'd say that's a good marker.

Jon - I would say, plus 60 or 70% chance we know within two weeks of election night. It would be extremely unusual.

Chris - November sounds like it's going to be interesting.

Jon - Yeah, yeah, but I mean, 30% chance we don't know, but it would be extremely unusual to go longer than that period of time. Florida and Arizona had really close elections for Senator and Governor in 2018 that went about two weeks past the Election Day. And usually these things are resolved. There's a couple of cases around the country over the last 30 years that it's taken longer than that, but it would be very usual to go longer than that. But this is a very unusual election, so, the risks are high.

Chris - That's interesting. Let's stay on the election topic and just shift focus a little bit to Congress. In your view, how important is it, or is it not, that there's either a sweep or there's a divided Congress? Or, what are really the effects? Should we see, say, for example, Democratic controlled House of Representatives, a Republican Senate, and either or in the presidency? Does the Senate play a much bigger role here, for example, than maybe some are thinking about?

Jon - Yeah, the Senate's really critical. I mean, if Biden wins with a Republican Senate, they're going to have an effective veto over everything he wants to do. They're going to stop his legislative agenda in its tracks. And I think maybe more importantly, they're going to make it really hard to confirm anybody to any cabinet level position from Secretary of Defense to dog catcher in charge. So I think that's going to be a really, really challenging environment for governance. You know, eventually they'll come to some compromise. When it comes to economic policy, there's not much of a center left in U.S. politics, where you've got polarization in the electorate, and you've got policy polarization as well. So I think it's going to be really hard for Biden to find people for the Environmental Protection Agency, for Department of Labor, for Treasury, for DOJ, for a lot of these really important Cabinet agencies, to find a, kind of, either a moderate or a Republican even, who'd be acceptable to the Republicans in the Senate. So that's a hugely important factor if Biden wins. If the Senate flips, then you've got a much more fertile policy making environment for Joe Biden. And he's running on an incredibly progressive platform. In my opinion, and others have said this, it's the most progressive platform in the history of American presidential politics. In kind of the modern era. And, you know, it's heavily influenced by Bernie Sanders, and it's heavily influenced by where the Democratic Party is going, generally, which is a younger, more urban coalition. And that's reflected in his policy choices. I think that there's a lot of Democrats who feel like Obama left a lot on the table by trying to compromise too much with Republicans and not taking advantage of the opportunities that he had early on in his administration to cement a lasting legacy. He relied a lot on executive orders. So, if the Democrats do have a two year run where they have unified government, I think that the Democratic Senate is going to really supercharge the Biden agenda. Big changes around healthcare, big changes around climate change, big changes in tax policy. And probably, assuming one doesn't get done in this quarter or next quarter, a large fiscal stimulus very early on in the Biden administration.

Chris - So, we're going to get to that policy discussion in just a moment, but let's just finish the Senate story. Because I think there's some interesting pieces to that. Are there any Senate races, in your view, that are either more important or more interesting to watch just given what's going on here?

Jon - Yeah, so the Democrats need a net gain of four seats. They're very likely to lose a seat in Alabama. So that's why they need four instead of three, right now they have 47 seats. Arizona and Colorado, I think they're going to win. I don't see how the incumbent in Colorado wins. It's a blue state, Trump's going to lose by 10 points. So that's a really hard environment to win if you're a Republican. Arizona, I think she has a shot, but, McSally, who's the current Republican Senator is absolutely an underdog. And she's running against a pretty good candidate, who's raising a lot of money. And it's going to be a competitive battle ground state in the presidential election, so I think she probably loses. So the two I keep my eye on the most are Maine and North Carolina, which I think are really true tossups. I mean, I think that the both Republicans are very competitive, even in a good year for Biden. And then a second tier of states I would watch are Montana and Georgia, and then followed by Iowa. And then on a really, really good day for Biden, South Carolina, Texas, and Alaska would be in play. So you're looking at Biden coming in, assuming he wins with between 49 and 55 seats in the Senate. And that margin really matters, because if you're at 49, Republicans have the majority, can't do anything. At 50 he has an effective majority, but it's still hard. You have to compromise where you can. At 52 or 53, you start getting a real lot of legislative momentum going. And they could potentially change the filibuster rules to allow the Senate to govern with a simple majority. And I think that's when the Biden agenda gets really supercharged, in that situation.

Chris - Once state you didn't mention was Kentucky. Why is that?

Jon - I just don't think, so, look, I used to work for McConnell, so take this with a grain o' salt, I just don't think he's going to lose. I think that his challenger's made a number of missteps. This is a race I follow pretty closely. There's yet to be a Democrat to challenge him in his 30 year, 35 year political career who's gone on to do anything else in politics because he's a ruthless campaigner. So I think he's going to win that race.

Chris - Just thought it would be worth noting there. You might have a little bit of special insight. Let's shift gears, because I think, the election, there's a lot going on, but it's still early, and many things can still happen. Races can be tossups and there tends to be a little bit of that momentum effect as you get closer to it. But one thing does seem important, which are policy, and to a certain extent, taxation, and kind of the policies that come from all of that. I think it's pretty clear, I think for most market watchers at this point, that a lot of the policies that have been enacted have been profit inducing, it's helped support the stock market. In many ways the policy supported on the fiscal side also have helped the consumers. They've resulted in, I think, a lot of things that can be framed in a number of different ways. From your perspective though, Jon, if you thought about the policy differences, maybe a quick compare/contrast between say, a Biden/Harris and a Trump/Pence, how do those things look to you? Well, some of them you listed, whether it's environmental rules, potentially, corporate profitability, tax policy, et cetera, but those are the basics. Are there things that you would add to that, or kind of explain in more detail around the policy dichotomy that voters are facing?

Jon - Yeah, it's unusual you have to stark contrast in policy approaches. And President Trump really took the kind of Paul Ryan Republican policy agenda, and took it to 11, you know, in its final tap. And then the Biden, with the shifts, with the increased polarization, and where the Democratic Party's headed, my expectation is Biden's going to swing the pendulum back further than where it was under Obama. So, this is going to be a huge, huge potential for a policy shift. You mentioned a lot of the big areas, on climate change they couldn't be more different. Climate change is one of the most important animating principles amongst Democratic base voters at the moment, especially younger voters. And President Trump has been solely focused on job creation in the oil and gas industry, and lowering barriers for companies to remove fossil fuels from the ground and get them to market. And the Biden administration is going to take the opposite point of view. And I think there's barriers to how much they can accomplish. You talked about the Senate, and one of the key Senators is, Democratic Senator, is Joe Manchin from West Virginia, heavily a coal state, and is going to be a real swing vote on climate issues. But I don't think that stops him from doing anything whatsoever. One of the advantages on climate they're going to have is that if they do an early stimulus bill, that's going to be potentially hundreds of billions or trillions of dollars they'll have available to spend on clean energy infrastructure, incentivizing solar production, wind, and so forth. So I think that's going to be an enormous focus for the first year of a Biden administration. On healthcare, the President's platform has basically been eliminate The Affordable Care Act that obviously didn't happen, it's not going to happen. The Democratic position is expanding The Affordable Care Act. And so, there's kind of two levels of expansion you can do. The first level is, ACA plus, you do a few more subsidies for purchases on the exchanges. Maybe you tighten regulations on insurers or you do something on pharmaceutical price increases. The second level could only happen assuming the Democrats eliminate the filibuster, because you can't do these changes under the Senates reconciliation rules. And we can talk about that if there's questions. But, if they go to kind of take it up a level, it could create a public insurer that would compete with private insurers that would massively expand the number of Americans who are covered by health insurance, and probably be negative for the sector. Labor is a huge area of divergence. I don't know how important that is to folks. But you know, I think a $15 an hour minimum wage, national, comes into play under a Biden administration. Reregulation in the financial services space, primarily focused on consumer products, as opposed to big bank regulation. I think that the CFPB is going to be a really important player in the regulatory space in a Biden administration. And then finally, you mentioned taxation, which is the biggest area of difference. You know, a lot of these programs cost money, obviously. And a lot of them cost a lot of money. There was a tally done by the Penn Wharton Budget Model that estimated the Biden plans, if you add them up, spend about $5.3 trillion over 10 years. And the tax plan, when you add it up, raises about $3.3 trillion over 10 years. And, when I worked in Congress those were considered pretty big numbers. Unfathomably big, actually, like, you just wouldn't do anything that cost a trillion dollars. But, we're in a different era now, and those numbers are more kind of plausible. I don't think Biden's going to get $5.3 trillion in new spending. But that ratio where he's going to have to offset a little bit over half of the cost of his new spending seems reasonable, the way to do that is through new taxation. And I'd be happy to go into some more detail about that.

Chris - Well, that seems important, because I think if you look at some of the policy choices ahead of us, and without getting overly simplistic, there's a narrative out there of kind of, one is profits, one is people, in terms of the focus, but the reality is there are other things going on. We've already accumulated a massive amount of debt. Fortunately, it's becoming easier to finance. But, at some point that does matter, unless we all subscribe to modern monetary theory, in terms of where we're going. So, that to me, I think reflects a good moment to talk a little bit about redistributed policies. Maybe the Part A, Part B. Part A, is there any way that if President Trump were reelected that we'd see any other redistributive policies, except for say red states? And then second, even more importantly, how far do you think investors, voters, would let Biden go in terms of redistributed policies should he be elected?

Jon - So, for Trump, you know, the redistribution from the Trump administration is happening from kind of, you know, an era of multinational corporate dominance in U.S. politics to an era of populous. And I think that's how I would think about it, Trump's second term. And by that, I mean, restrictive immigration policies designed to help native, not Native Americans, but, you know, people born here, recently. And then, two, pre-policy, which is, previously had been basically fairly open borders, basically no restrictions on investment coming into the U.S. And, ease of trade across international borders. And that's changing under President Trump. I think those are the two main vectors for redistribution. I don't see them increasing social welfare spending, and I don't see them increasing taxes to pay for it. Under a Biden administration, they've got very specific plans, education, we mentioned a few of them already, about how to spend the money. And he's also laid out really specific plans about how to raise the money. The most important of which, is undo the Trump tax cuts. And, Trump tax cuts, I don't think that's, politically, that controversial. The Trump tax cuts polled terribly. They were the least popular tax bill in public opinion polling in 30 years, less popular than either of the tax hikes under Clinton or George H. W. Bush. It's not exactly a layup, but it shouldn't be too hard to find the political will to raise these taxes, and that's what Biden's campaign running on. When it comes to modern monetary theory, and kind of the financing of the debt, the most important piece of written about this was by Larry Summers and Jason Furman, written like three years ago in "Foreign Affairs Magazine." Pointing out that in the '90s when deficit reduction was the big thing, the big policy impetus in the second Clinton administration, interest rates were something like 6%. The debt, as a percent of GDP was projected to go from 40% to zero over the next 10 years. Today, interest rates are half a percentage point on the 10 year note. Real interest rates are lower than that. And the debt as percent of GDP is projected to go from, at the time this was written, 75% to 100+%, now we're already at 100+%, and we're still borrowing with really low rates. So that was kind of, to me, indicative of a sea change in attitude towards debt and deficits. And that's kind of a wonky policy argument. But it's going to translate into the political sphere, because what politicians want is an excuse to spend free money, and that's basically what they have right now.

Chris - I think those that are tuning in, modern monetary theory is an interesting way to look at whether or not debt matters, particularly if you can print your own currency to satisfy the debts, the term called seigniorage. And that gets to the idea that if we can print money in order to satisfy a lot of the, either obligations or preferences, why wouldn't we just do that? And the question behind all of it is do deficits matter? And maybe to that question, related to taxation. If I were to draw those two things together, if there are redistributed policies, Irving Fisher, a former chairman, a vice chairman of the Federal Reserve was out recently. And just on this point, the taxation function, which largely favored corporations, at least in the Trump tax cuts, is an important one I think that you hinted at. But Mr. Fisher's position seemed to be endorsing the idea that you tax capital and income at the same levels. So how do you think about that, Jon? And is that something in the Biden proposal that might be considered? And is that anything that President Trump might consider?

Jon - So, yeah, I don't think Trump is going to, he's not raising taxes, I don't think it's on the table. And there's a bunch of tax cuts from the 2017 act that expire over the next four years, that I think would be the kind of tax policy of a second Trump, extending those would be the tax policy of a second Trump term. And the Biden administration, the Biden campaign plan has already proposed raising taxes on capital to be closer to income tax rates. Most specifically, by raising the top rate on capital gains. Biden said he's not going to raise taxes on anybody making under $400,000 in combined income. That threshold in the Obama administration was $250,000. So that's gone up in the last couple o' years. I don't know why, but kind of politically, they decided that's the threshold at which they can start taking more of your income. So, I think that it's likely you see the capital gains taxes go up. They may not go up all the way to the top marginal tax rate, which is also going to go up, probably to 40% on people making over $400,000. What they might do instead is extend, and I'm speculating here, because the plan doesn't offer this, but they might extend the timeframe for how long you have to hold a capital gain before it can be realized that the preferential rate. So that's one way you might go about kind of giving and taking away at the same time and looking like you're not doing too much harm, that you're causing it. Corporate tax is absolutely going up. The pre TCJA rate was 35%. They got it down to 21%, which is right around average for the OECD, America's kind of peer competitor countries around the globe, once you take into account the sub national taxes. So, once you take those in account it's about 24% average corporate tax rate, which is right where it is in Germany and so forth, on average. So, the Biden plan is to move that from 21% to 28%. I think that probably happens. I would probably bet on that happening with an effective date of 2022, or maybe 2023, but probably 2022. And then there's a couple of other changes that I think are really going to matter to American corporates. For example, taxing the multinationals profits overseas at a higher rate. Right now there's a worldwide minimum tax effectively in place called GILTI. And the Biden proposal's going to make that tougher and tax those profits right away. Excuse me, I've got to let a dog out of my room. I'll be right back.

Chris - That's okay, we love dogs here. While we're waiting for Jon to get back, we've been covering some of the critical areas around the election, politics, policy, and ultimately some of the big tax questions that we think investors, and ultimately voters are going to have to contemplate as part of their decision making process. So, Jon appreciate that you've covered some of those areas, maybe one last point before we shift gears to a little bit around the markets piece. And that's the idea that kind of, extending modern monetary theory, meaning the debt deficits and solvency risks, do they matter? But, let me ask the question this way. What are the kinds of tradeoffs that you think Republicans would need to make versus Democrats would need to make going forward? I think you described a world where there's some redistributive tax policies. But, is it really as simple as just a sweep and enact your agenda, or are there likely tradeoffs either with states or the way financing all of this works? Is there some room, depending on how things play out for even federal policy to change at certain levels, whether it's on the fiscal side or even on the monetary side? So, just engage in a little bit of speculation around that, if you wouldn't mind.

Jon - You mean the tradeoffs between the parties?

Chris - Yeah.

Jon - If you look at voting patterns in the House and Senate and you look at them, there's something called a DW Nominate Score that ranks each member based on how often they vote with members of their own party. And you look 50 years ago, the scatterplot was, all the colors were overlaid. If you look at the last four or five conferences, there's just these clumping’s around the other side, which just reflects, just complete breakdown in bipartisanship. And so, I don't see a lot of room for compromise. If there's a split Congress, I think the likeliest outcome is gridlock. If Democrats continue to hold the House and Trump is reelected, they'll keep the lights on in the government, they'll prevent shutdowns, they'll respond to emergencies the way they did with the Cares Act. But look what's happening with phase four stimulus where they just can't agree, even though the need is acute, the borrowing costs are low, and they already have a bunch of policies that both sides said they want, there's just no agreement. I don't think this election, where 50% of the country is going to think it was stolen from them, either by the postal service, or by phony mail in ballots, which is the rhetoric surrounding this election, I don't think that environment is conducive to repairing those partisan rifts. I think that right now the theme in Congress is grab power and use power, and you saw Trump and the Republicans do it in 2017. And I think you're going to see Biden and the Democrats do that in 2021. Sorry, if that's pessimistic.

Chris - No, we have devolved in some ways, and I think I'd agree with that. Okay, let's stay on the markets and trade piece, because I think this is an area that your group in particular has a lot of expertise. And this will wrap up, our kind of formal section before we turn to some questions from the audience. And we have quite a few, so, this is good. Maybe the first thing to just touch on is global trade. One of the narratives that's out there is the idea that a combination of higher taxes in the U.S., maybe a little bit stronger growth, a lot more certainty around trade issues, if we can get away from this pure bilateral approach, could be a good thing. A, do you have views on that, and B, should Trump be reelected and we have more of the same, there seem to be some consequences around bilateral actions and a lot of the rhetoric that has developed around trade and in particular, with some of the policy advisors in the White House around that. So, while I think the China story is one that most people are familiar with, the theft of intellectual property is part of that narrative. The idea is, how do those two things play out in a world around trade? And is it that clean cut, or is it really, there's a lot more going on in your view?

Jon - I think Trump, to his credit, called out China for doing things that harmed American companies. And, you know, when I was a policy advisor on the Hill, we'd have CEOs come in, and the first thing they'd say to us is that China's eating our lunch. And we can't say it publicly because we want to be there. But the reality is that they're eating our lunch. We don't send our newest technology there because we know they're going to steal it. And this was constant, constant from CEOs of major companies coming in to talk to members of Congress behind closed door. So, Trump, to his credit called that out and has taken action. You may not like the actions, I'm agnostic on the policy, actions, whatever. But, the challenge with Trump is that he sees cheating going on everywhere. So it's not just China, it's the EU, it's Canada, it's Mexico, it's a lot of our trading partners, it's Japan. It's a lot of our trading partners that would be really important for forming coalitions to address the greatest threat to American power, which is China. And he's kind of blown those coalitions up. And under a Biden administration it's going to be, Trump's been all sanctions and tariffs first when it comes to international relations and trade, Biden's going to be diplomacy and multilaterals in first. And that's going to be a very different approach in terms of tone and approach. But I think, especially when it comes to China, not the rest of our trading partners, but China, the direction of travel is going to be largely the same. I think that the China situations kind of become politically untenable in the U.S. and Trump has now blown up the narrative to the extent that Republican and Democratic politicians are going to take a really tough line against China. I think for the foreseeable future, until the Chinese change their behavior. Not sure if that answers your question. If there's more you'd like to flesh out, happy to talk about it.

Chris - I think it gets harder, in terms of trade policies, continuing in terms of a certain direction, particularly if your view is that everyone's cheating, and you want to correct that, and you have to correct it with a stick.

Jon - I think that Trump's second term is going to be real tough on China, and I think the bigger threat. And that's okay, I think that people are learning to kind of work around that. Bigger threat though, is what he does with Europe. There's not going to be a trade deal between the U.S. and the EU. Auto tariffs would be extremely damaging across the country. And that's probably what you're looking at in a second Trump term.

Chris - Last question then, maybe for me, and then we're going to shift gears. Maybe to the extent I ask you to step a little bit outside of your comfort zone. Another piece of the received wisdom that the markets are always willing to give investors is that a Biden win is largely being priced in now. Some of the narrative that I had shared earlier, "Hey, we'll get better trade deals, even though we'll have higher taxes, et cetera." In your view, and your experience, Jon, how do you think about markets reacting to binary advance, policy changes and the like? Is it something that you think it's going to be all smooth or would you expect things to be pretty bumpy, in your view?

Jon - Yes, I mean, like you said, this is outside my lane a little bit. But my understanding from clients is that the most important force in the market right now is the Fed. And that the election matters and that people's expectations about a phase four stimulus matter, and people's expectation of policymaking in 2021 matter. But in terms of what price is priced in, you're seeing the Fed be the most important player. I will say, when it comes to the market effects policy changes, the dominant theme that I picked up from clients is that Biden would be good in 2021 because of stimulus. You're much more likely to get a large fiscal stimulus in 2021 that will be market positive. And I think that's right. I think where clients are wrong is on two things. One, is on trade policy, Biden's not going to walk back the China tariffs. He will be a little more predictable, and put a little more structure around an America first trade agenda. He's already rolled out a buy America trade agenda. His focus on trade is really similar to Trump's. So I don't see a sea change there. Where I think the Biden effect really starts to bite is in 2022 and beyond. Once the fiscal stimulus has faded out of the system you're going to be left with higher levels of regulation, higher corporate taxation, and brand new tax on U.S. multinationals that makes the U.S. a less attractive place to invest. Those effects compound and accumulate over time. But that's the long run. And in the short run, Biden's probably gives the more immediate jolt to markets in 2021.

Chris - Interesting, last little question here. And it's just a probability, how would you peg the odds of a JGTRA act like we saw in 2000 or 2002, jobs growth, tax, and reconciliation act, where there's direct stimulus to companies to rehire people?

Jon - Oh, I would think the focus is going to be on reshoring production, as opposed to, which aspect are you most curious about in JGTRA?

Chris - Is whether we see a direct stimulus program for companies to rehire?

Jon - A tax credit? Well, there's a lot of tax credits that exist today for hiring people, and it's totally possible. I think the dollar amount's relative to the other pieces of what I would expect in the stimulus bill on just direct spending, and then, are going to be higher, and incentives to reshore would probably be higher. Whereas the dollar amount of any hiring program is going to be relatively small relative to that. That's just my guess.

Chris - Got it, got it, okay. Well, that brings, I think, your and my section to a close. I think we've covered a lot of ground, but I will tell you, there are a great deal of questions. I don't know if we're going to get to all of them and I may just do rifle shots. If you think it's a single answer to the question, we're going to try to get through with Jon as many of these questions as possible, and I'll try to group some of them together. So, maybe we'll just start at the beginning. And it's just one that seems to come up a few times, which is, you know, Jon, from your perspective, are any of the social issues that are going on, I'm putting a lot of these things together, important to the swing states, to the nation as a whole? And how do you think about some of the narratives that are developing along political lines, whether it's a focus around law and order versus some of the social unrest that's happening in so many different areas of the country?

Jon - So nationally, no, Trump's law and order message is that making a difference to his national numbers. But, he's not trying to win a national election. He's trying to win an election an in Wisconsin, Michigan, and Pennsylvania where 2/3 of the non-voters in 2016 were white voters without a college education. So he can goose turn out with that group by just a couple of points, he's going to win. So, and there's not good enough polling data to tell us yet if that messaging is resonating, but nationally, it's not helping him right now.

Chris - Got it. What do you think about the probability of a vaccine? I know it's a tough question, but there's a lot of folks out there betting that it's going to happen by November. And a lot of folks saying "No way, not until 2021."

Jon - I think the probability of a vaccine announcement of a safe vaccine before the election is high. How effective that vaccine is, I don't know. The threshold The FDA has laid out is they want it to be 50% effective. They can lower that threshold and get it to frontline workers, and make an announcement mid-October that everything's great. And then distribution of that vaccine won't happen until 2021, is my understanding.

Chris - On the topic of ballot rejection. So it looks like there's some reports that North Carolina may have rejected a bunch already, is that part of the narrative that I think you've talked about, in terms of the feeling that some folks are going to view the election is stolen? And the mail and rejection ballot percentages, are they higher than what you'd expect given what you've seen historically?

Jon - So I have the data up on my screen here. North Carolina started sending out absentee ballots on Friday of last week. And there's been 45,000 returns so far. I don't know North Carolina Carolina's population, it's a lot bigger than 45,000, so this is a small sample. But, the rejection rates are meaningful because this is the big problem, this is the big question. Some states are giving voters the opportunity to get right if their ballot has been rejected. Arizona, there was a recent court case that said Arizona voters have up to, I think it's three to five days after the election to fix it once they've been notified. And that's going to be a really critical thing and states could still fix that going forward.

Chris - Good point there, good point. A small sample size relative to a couple million people in that state, so, good point. Just speaking of that, polling data, how accurate do you think it is? The misread of 2016's on everyone's mind. Everyone from Nate Silver to you guys, to others, and all these websites, some people have focused just on the keys. There's some political punditry around that, or even some truths to it. How do you think their accuracy will play out? And is this the ending of polling? Should it actually turn out that it's completely wrong again?

Jon - Yeah, no. So, polling's a diagnostic tool. It's the best tool we have to get a snapshot at any point in time. And we should use it along with other tools. That said, in 2016, the polling wasn't bad. The polling predicted nationally that Clinton was going to win by three points, she won by 2.1. The polling in 45 out of 50 states got it right. In Pennsylvania and Michigan they said it was a tossup. Trump won by less than a point and a half. And the polling was wrong in Michigan, Wisconsin, and Pennsylvania, which are small states, hard to poll, And there were surprising changes in the electorate where there was a bigger split between college educated and non-college educated voters than pollsters picked up on. They've since corrected for those splits. There's going to be more polling in the swing states, which gives us a richer tapestry from which to draw on. I think that it's the best tool we have, and we got to stick with it.

Chris - The polling revival is on the way, I think that's what you're talking about. Changing filibuster rules in the Senate has long been viewed as a nuclear option. In fact, Harry Reed and a few others have hinted as much. Is that, in your view, a real probability, should the Democrats take the Senate? And if you had to pin it, what would it be?

Jon - If the Democrats had 50 seats, the odds are 30% that they'll do it. If they have 52 seats, there's a sharp increase in the percentages, depending on how many seats they have. At 50-50, I think its 30% odds they do it. At 51-49, I'd say it's 50/50. At 53 or above, I'd say 80% chance they do it.

Chris - Wow, will that change our democracy forever?

Jon - They can do two things that matter a ton in that scenario. One is, well, there's a third thing. There's two things they can do. They can pass HR1, which is a voting rights act, which would increase the ability for minority voters essentially, to have ballot access. Which more minority voters tend to go for Democrats. So, it gives them a structural advantage. Two, they can pass D.C. statehood, which the House of Representatives already passed earlier this year. If D.C. becomes a state that's two additional Democratic Senators. So now you've got a Senate of 102 people, two of whom are basically guaranteed to be Democrats, structurally tilting the playing field in their advantage. Three, 2020 is a census year. And with census years come redistricting at the state level. In 2010, a good year for the Republicans, they took over a bunch of State houses, redrew a bunch of districts in their favor. 2020, probably going to be a good year for Democrats that are going to have an advantage at the State houses who are drawing these districts that sets the course of the House of Representatives for a decade. So I think this election could be extremely consequential. And eliminating the filibuster will be extremely consequential for the medium term. Now, of course, what happens in American politics is there are no permanent coalitions. The Democratic Coalition, right now, is an urban coalition. The Republicans are a rural coalition, and the suburbs are the battleground. As the urban coalition becomes ascendant there's backlash, giving Republicans opportunities to pick up pieces in the suburban areas. Which just means you'll have shifting coalitions and shifting policy alignments.

Chris - Ebb and flow of politics. One thing though, that I think will be important, and love to hear your thoughts on it, quickly, or even if it's long. What would happen to social security under either potential candidate?

Jon - Not a thing, no one's going to touch social security. The likeliest change to social security in the next 10 years, five years, is that they implement some kind of new payroll tax to help with solvency. And that is part of the Biden plan. He's proposed a full implementation of the full 12.7% payroll tax, 12.6% payroll tax in incomes over $400,000. Which wouldn't affect the rate, but will be a huge tax increase on every dollar over $400,000. I don't anticipate anybody's going to touch benefits. That truly is the third rail of American politics.

Chris - So, no means testing, then?

Jon - I'd be super shocked if we see any changes to social security before we absolutely have to, the day we absolutely have to is the date of insolvency, which I think now is projected for the late 2020s.

Chris - Yeah, that's the case. So we're going to ride that train to the end, interesting. So we have a lot of tax questions that are coming up here. And I think rather than do one, by one, by one, I'm going to just ask a blob of them together, and we'll see how that goes. We talked a little bit about capital and income gains. Biden changing, potentially, some of that. Can you talk a little bit about three things? One is, long-term capital gains rates, number one. Number two, the potential for any changes, assuming, say, a sweep, in terms of Democrats in the market. Three is SALT deductions, state, and local taxes, whether or not that would be an issue in your view? And then, the last piece of this is how do you think about inheritance taxes and other tweaks to the code exemption levels, et cetera? And I realize I've asked you the everything tax question all at once. So, there's a lot there.

Jon - Yeah, remind me if I forget one. We'll start with SALT. And SALTs, the cap's going away, and it's going away for an interesting reason. Because, under a Biden administration with Democratic control of the Senate, SALT cap is going away. The New Jersey, Connecticut, New York, California delegations in the Democratic Party are large enough that the Democrats cannot pass a tax bill without getting rid of the SALT cap. Those guys will vote against it. So, I think it's gone. And that'll move along with some changes to the top marginal tax rate or the top capital gains rate. And it's kind of like we're giving and we're taking away at the same time. Long-term capital gains, the preferential rate will maintain for people under $400,000. And I think it's like graduated now 15 to 20. I think it goes up from 20 to closer to the top marginal tax rate for people making over $400,000. I'd be really surprised to see it go up all the way to 40%, which is where I think the top income tax rates going. There is a proposal to cap deductions at a 28% rate, which Obama originally proposed. And you'll notice it didn't pass into law because it's unpopular. But, with other tax changes, that may be some kind of proxy for where the capital gains rate ends up. So maybe it ends up at 28%. It's really hard to say at this point. Estate taxes, the exemption could go down. I don't know exactly the details of the Biden plan, but I think the exemption could go down, and the rate could go up. I'd also, if I were somebody that held onto a family held business, be watching very closely a proposal from Senator Ron Wyden, the Democratic ranking member on the Finance Committee, Senator from Oregon, who's proposed a mark-to-market tax. So any non-liquid assets that is held instead of the tax being realized on the disposition of the asset when you sell it, capital gains will be assessed on an annual basis. You essentially marketing-to-market the value of that good. You'll also get a deduction if there's loss on an annual basis. So, it kind of cuts both ways. That's a form of a wealth tax and in the absence of an actual wealth tax in the Biden plan, if the momentum for that comes back up in 2021, I think that could be a place the Democrats go. Did I catch them all?

Chris - Yeah, you got most of them, yeah, they were there. Particularly the last one with the exemptions and the taxation there, I find that interesting, sounds administratively complex.

Jon - It's all very administratively complex, yes.

Chris - Let's shift gears on the healthcare side. So, if you thought there was a Democratic sweep, what would a Democratic Senate do potentially to the Affordable Care Act? What would they either reinstate or try to add or change, are there different processes or mechanisms to do that? Or, has too much water gone under the bridge relative to the entire ACA?

Jon - I mean, the ACA is not going anywhere. The Republicans were unsuccessful in their attempts to even limit it a little bit. I think that the Democrats focus is going to be, the key hallmark of the Biden campaign was that he's going to be tweaking our current healthcare system, as opposed to rebuilding it, which is like what the Medicare For All plan would do. Biden has proposed lowering the Medicare eligibility age. You've got some workers down to the age of 60 who'd be eligible for it. Which would help some employers, because they would no longer have to carry you on their health insurance. But, when it comes to the ACA, I expect a deeper well of subsidies, basically. I think there's just going to be more money put towards tax credits to help people buy insurance. That can be done under reconciliation. If the filibuster is eliminated, then I think you see a much more aggressive push around a public option, which would directly compete with private insurers and eventually take over a larger and larger share of the marketplace. At least, that's how health economists explained to me. So I think that's probably the thing to watch. The filibuster's really, really important for what the Biden ambition is around healthcare.

Chris - And if it weren't just the Affordable Care Act it just might be the breadth of the coverage, and important if you're thinking about an aging population base and rising healthcare costs, you want to reduce the number of bankruptcies associated with healthcare to zero if you can. Just kind of picking up on that tax policy question. I think there's a number of questions that we have coming in related to, I think a viewpoint that should Biden win and enact all his agenda, won't he just destroy jobs with all of that? And I recognize your position, Jon, where you come from, but, markets lived through Obama, they lived through Clinton, they lived through a lot of different regimes. There's, always opportunities there. I think that's what entrepreneurs do, they find those opportunities. But, there certainly is a narrative that's been stoked up around job creation as a direct result from taxation reduction. And while that may have be easily refuted empirically, how do you feel about that?

Jon - I mean, don't let me go on too long here. So there's different two things. One is, there is no economic policy section on Biden's website. In previous Republican campaigns that I've worked on, that was a width that was a really important thing to have was like jobs and the economy. Least last time I checked, it's not there on Biden's website because that's not a primary concern of the campaign. So I think that they make that charge on want, he's going to talk about giving more people healthcare, giving more people access to pre-kindergarten and so forth. I think that's an argument they're happy to have. And that's just indicative of where politics are today. The second thing I'd say is, you know, in 2014 to 2015 there was a lot of talk amongst economists about secular stagnation. A 2017 and 2018 there wasn't that much talk about it. And one of the big changes between those time periods was policy. So, what happens when you've got Obama plus levels of regulation, Obama plus levels of taxation, what does that do to the economy? I don't want to impose my own worldview here, but, I agree that longer term, I think this is probably negative for growth and negative for capital investment, and negative for productivity growth. Now you could argue the other side, which is, freeing people from the obligation to have an employer who provides healthcare makes them more productive and more able to change jobs, and returns bargaining power to the labor side. Providing people with out of home care for their children means they can go back to work, increases productivity. I think there's arguments on both sides. But I think if you just look at the broad economic narratives over the last 10 years, the Trump administration, up until COVID hit, had a pretty good record on job creation, and a pretty poor record on environmental protection. So these are trade-offs you got to make.

Chris - Good points, I think with respect to that, I think the challenge is that things often get crushed into soundbites. And soundbite equals, if higher taxes, then equals lower job. And the whole, if/then problem that we face as listeners of information is going to be a hard one, I think, and one that will require a lot of education. We have just a couple minutes left.

Jon - Well, you sprung that on me in the lightning round. So I'm trying to get a... I'm going to draw that out.

Chris - I'm trying to do a couple things here. I want to close on a high note. So I'm going to go on a little bit of a low note here. There's a lot of questions about contested election. In a world where 15 days goes by and we're still counting in Wisconsin, Pennsylvania, and maybe Florida's not decided, the President is still in lame duck session, just declares whatever he declares, and stirs the pot even further. Your view on something like that happening, and again, that's speculative, so let's leave it in the realm of speculation. And how you think there might be a reaction, both politically, and if you care to think about it on the markets and the policy side?

Chris - Yeah, I think this is a huge risk. And this is one of these risks, when I first thought of it, I was like, this can't matter that much. But the more I dug into it, the more worried I got. And the President's tweets alone don't mean anything. He can tweet all day and night, and it doesn't matter. It's not changing anything. But, a coordinated effort by either party to contest the election could result in a situation where we actually don't know who won. We actually don't know who wins a swing state. There's enough contested votes in a state like Pennsylvania, that the Democratic governor says one thing, the Republican legislature says another. And the way this is all supposed to get resolved is by a joint session of Congress on January 6, where they consider each of the electors from the state level and they can adjudicate disputes between the two chambers. In a situation where the Republicans continue to control the Senate, and the Democrats control the House, there's no way to resolve disputes. None. Federal law and judicial precedent here don't give you good guidelines for how that would ever be resolved. A case where the two chambers can't agree, and there's disagreement amongst the state. So I think it's a small probability, 5% or less, but it's a big risk if it comes to that point. And the mechanics matter. And I can talk about that for an hour, but, we're in the lightning round, so I won't.

Chris - So small probability, but high severity. So something we should be watchful for. And I think from an investing standpoint, don't confuse that with investing, think that of as a more of an insurance problem, if anything.

Jon - Yeah, and I'd also say from an investment standpoint, not knowing the election results on election night, it's not that big of a deal.

Chris - All parts that are in place will stay in place, until such time as they change. So the reality is we understand them now in terms of the tradeoffs you framed, lower taxation at corporate level, higher cash flows, profitability, those things remain in place then as long as it's contested. So just a last question, maybe just around inflation, and let me tie it back to the debt deficits and kind of the policy choices, that regardless of who's in the White House, that we're all going to have to make as voters and ultimately Congress will have to enact. One of the interesting factors over the last, a long period, Joseph Stieglitz has written about this as a number have, well-known economists, is the use of technology in the corporate sector, the relentless pursuit of profitability, and ensuring that the marginal profitability in a world of low growth is enhanced by technology. That seems to be something that will butt heads with the Fed's mandate. "Hey, I’ve got to have everybody fully employed." But the reality here is what policies or procedures would you see anything coming out of, on either the fiscal side, or a potential president to think about inflation? That's one of the ways out of all of this debt. And if technology is kind of the immovable object, what's the irresistible force if we're going to try to push inflation higher, else, are we trapped here given the kind of state of affairs?

Jon - I think the attitude amongst elected officials around inflation is just hope and pray that things don't change. You've got a perfect situation right now where technology will change and global savings polls means that there's just not that much inflation right now. That they can print a bunch of money with no consequences. And that works really well for elected officials. And they'd like to make sure that, they'd like that to stay the same. But I don't know if they know how to effectuate policies to keep that the same. I can't think of any policy proposals right now that get at this issue. And in fact, you could argue that some of the rising anti-technology sentiment would be bad for innovation in the tech sector, and potentially inflationary in and of itself. Breaking up Google, regulating Amazon, or so forth. That's not a directly direct answer to your question, but, when I think about Congress and their relationship to these issues, there's no direct path to get there.

Chris - Got it, got it, okay. And maybe to wrap things up then, I think we'll bring our session today to a close. And what I want to do first and foremost is thank you, Jon. And thank Eurasia Group for sharing with us your thoughts, your insights. And I think in this environment, just a few short weeks in front of what's likely to be a notable and historic election, I think it's important for everybody, investors and our clients to have a good understanding. And I think you've helped to put a spotlight on a lot of the issues. And very much appreciate your perspective. For our listeners, I'd like to remind you that this is a first of a series of seminars that we'll be doing to enlighten the issues around the election, around taxation, around markets, and the behavior of both before and after the election. If you'd like to join more, please visit our website at www.firstrepublic.com. With that we'll sign off for today. Thank you, Jon, and thank you everyone for your attendance.

Jon - Thank you, Chris.

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