Presidential Change Has Limited Range

As always, we favor no candidate or party and assess politics solely to analyze how it may impact markets. We believe political bias is blinding and dangerous for investors.

Dissolving NAFTA. Breaking up big banks. Capping prescription drugs prices. Eliminating the federal Department of Education. These are just a few policies this year's crop of Presidential candidates propose, and there is probably something for any voter to love or hate. But while candidates often promise big, sweeping changes when campaigning, the realities of American politics constrain them once they become President, and few of their extraordinary proposals end up coming to fruition. Populist campaign rhetoric might stoke volatility, especially as the candidate field narrows, but the risk of actual, radical change appears low.

Across the political spectrum, candidates are proposing bold moves they believe will win them votes and build their base. Perhaps some even believe these ideas are good, steering the US in a better direction. Nevertheless, our list above contains ideas many would consider radical. Donald Trump said he would either renegotiate or axe the North American Free Trade Agreement (NAFTA), believing it caused US jobs to move to Mexico.^[i] He also vowed to impose a 45% tariff on imports from China, to compensate for the supposed economic advantage China gets over the US by devaluing their currency. Bernie Sanders proposes universal health care and free college tuition, as well as a tax on financial transactions to help pay for it. He also said he would break up big banks to end "too big to fail." Hillary Clinton promises to force pharmaceutical firms to spend more on R&D and less on marketing, and both she and Trump want Medicare to re-negotiate drug prices with pharma companies. Ted Cruz wants to abolish a slew of federal agencies, including the IRS and the Departments of Education, Energy, Commerce and Housing and Urban Development.^[ii]

But Presidents don't have the power to do most of these things unilaterally. Virtually all require acts of Congress. The US Constitution gives Congress the power to impose taxes and regulate interstate commerce, and largely limits the President to enforcing the laws Congress passes.^[iii] The president can also issue executive orders (EO) and actions, but they are limited in scope. Presidents can't enact broad statutes, just fine-tune the implementation of pre-existing legislation. Moreover, EOs are subject to judicial review, so if a President oversteps his Constitutional authority, the courts can strike them down (or press the pause button while they review). A President can instruct agencies to not enforce a provision of a law he doesn't like, but abolishing federal agencies or nationalizing industries likely wouldn't fly with the courts^[iv]. Also, cabinet departments can reinterpret legislation and use that as a guise to craft new rules, but it's fairly limited, like Treasury's feckless efforts to battle corporate inversions. The Department of Education couldn't just reinterpret an existing law as grounds to eliminate itself.

That likely means Cruz would have to have Congress on his side. Ditto for Bernie Sanders, whose trio of ideas all require legislation. Now, the Executive Branch can do some of these other things on its own, but only to a fairly limited extent. A Trump Executive Branch could renegotiate trade agreements, like NAFTA. But when it is done, Congress would need to ratify the amended deal for it to become law. A president can't unilaterally rip up existing trade agreements. A Trump White House could levy tariffs on foreign imports under the auspices of existing legislation and anti-dumping provisions, but if Congress objects, it could quickly pass legislation overriding it. If the objection is strongly bipartisan, Congress would likely have enough votes to trump^[v] a presidential veto. As for the Clinton/Trump desire for the government to hammer out a cheaper deal on pharmaceuticals, the government directly negotiating with pharma firms would require legislation. They could try to act through the insurers who offer up Medicare Part D plans, but many in the field suggest this would be pointless, considering they already do negotiate pricing (the very system these candidates argue needs changing).

Checks and balances exist for a reason. For all the broad support Presidents have when elected, it's no accident America always picks a diverse band of legislators. The two parties have multiple factions. House members represent constituent interests and horse-trade on behalf of their people all the time, resulting in lots of give and take and watered-down changes. So even if one party ends up controlling the White House and Congress, measures widely viewed as too radical likely won't have broad legislative support. Congressmen, first and foremost, want to get reelected. They tend to avoid supporting policies many see as extreme, lest they alienate certain voting blocs. In 2008 candidate Barack Obama proposed universal health care coverage. But despite his party controlling both chambers of Congress, the idea never advanced. Candidate Bill Clinton proposed universal health care during his 1992 presidential campaign, but 1993's Health Security Act died in the Senate-despite Clinton's party controlling the chamber. In 1980 then-candidate Ronald Reagan proposed drastic cuts in government, but federal spending grew throughout his entire eight-year administration.

The realities in Washington also constrain the president from implementing extreme policies. As Bloomberg's Megan McArdle wrote recently, bureaucracy gets a bad rap-most often, deservingly-but it is a powerful check on executive power. Presidents could issue edicts ordering agencies to radically change course, but if civil servants don't agree they can simply keep doing business as usual. That might sound like blatant defiance, but often, it's as simple as "Oops we can't do that thing he said because it violates policy, or we don't have the manpower, let's back-burner it and hope it goes away."

Most agencies' day-to-day business is fairly separate from their cabinet overseer. Treasury staff figures out how much debt to issue and refinance at various maturities. Employees of the Department of Education collect and analyze education data and oversee student loan lenders. And Health and Human Services staff work to stymie infectious diseases and prevent food borne illnesses. Because of regulations intended to shield government employees from political pressure, it's almost impossible for the President to fire wide swaths of civil servants and replace them with people more on board with his policies. Former President George W. Bush faced much flack for firing seven US Attorneys in 2006, as opponents claimed the president targeted them for political purposes. Imagine the firestorm that would ensue if President Trump tries to dismiss the bulk of US Immigration and Customs Enforcement employees because they refuse to implement his immigration policies. It would be huge.^[vi]

Radical pledges can stir sentiment and volatility. But ultimately markets move most on probabilities, not possibilities, and as we move through the election and inauguration, markets should slowly fathom that, for good or ill, radical campaign pledges probably won't take flight.