Gulfing

October 10, 2018 - Published by IAG Wealth Partners

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The gulf continues to grow.

The political theater last week highlighted one of the more challenging aspects of living in a country with an economy based on capitalism and a government based on a “small r“ republican form of government.

The political class increasingly feels the need to create powerful spectacles that they believe will manipulate voters into giving them the power they love or covet.

In my reading this week I came across the graphic below from the Pew Research Center. It is a bit dated, but based on the events of last week it would be very difficult to argue that the trend has reversed.

In 1994 the average Democrat and the average Republican were ideologically within talking distance and most Americans were near the middle on the political spectrum. By 2014 the middle had melted and talking distance had turned into shouting distance.

As the political middle disappears to create a gulf between the left and the right, there are real implications for investors.

In the past federal policy shifts had been generally modest. New federal laws or regulations would take effect that would impact employers, and they would spend the time, energy, and resources necessary to comply with those small shifts in policy. In the sea of dynamic change that comes with an economy rooted on capitalism, government policy based on compromise was a relatively stabilizing force.

Based on the increased polarization of our political leaders and their tribes of voters, compromise is no longer an art form but a political death knell. We now live in an “all or nothing” political environment with a growing gulf between Americans.

If this all or nothing mentality continues to expand, government policy could shift dramatically in short periods of time depending on which political party is in power. Suddenly what has been a stabilizing force in the past develops into an additional storm to churn the seas.

The precise impact is not quantifiable now, but it is difficult to imagine that increased costs for complying with constantly-changing government policies would lead to higher profitability in the future. Lower profitability could lead to lower future returns for investors than they have experienced in the past.

The future is by definition unknowable, and our young country has survived more serious divisions before. Hopefully Americans’ creative ingenuity which has created the largest capitalist economy in the world can adapt to a threatening political gulf.

 

Quote of the week:

 

Dutch proverb: “In prosperity, caution; in adversity, patience.”

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