Economic Friction: Scoring the 2020 U.S. Presidential Candidates
Whose policies will grow economic activity in the U.S.?
Which of the plethora of candidates running for the U.S. presidency in 2020 will be best for the economy? One way to answer that question is to see which candidates are likely to implement policies that lead to growth in economic activity.
What Drives Growth?
In my book FRICTION I provide examples and research data showing that one major determinant of growth at the national or regional level is how easy it is to conduct business. Indeed, the World Bank thinks this relationship is so important they publish an annual report, Doing Business, that ranks countries by how easy it is to start a business, get credit, get construction permits, and perform other common business tasks.
Even within a country, legal and cultural differences can create very different outcomes. In my book I describe research by AnnaLee Saxenian that explained why Boston’s Route 128 was surpassed by Silicon Valley as the epicenter of technology. Palo Alto and its environs proved to be a lower-friction environment for business formation and growth, aided by a robust network of people and vendors that often put cooperation ahead of competition.
Thirty years ago, India and China had economies of similar size. Today, China’s is eight times larger. While there are many reasons for this disparity, in Friction I show how India’s byzantine bureaucracy and convoluted legal system stifled business growth and forced would-be entrepreneurs either to operate in the underground economy or to leave for countries with more business-friendly environments. (More recently, the Indian government has taken steps to improve the business climate and even touts its improving rank in the World Bank Doing Business report.)
Currently, the United States is a fairly low friction place to do business. It ranks eighth on the World Bank list, behind New Zealand, Singapore, Denmark, Hong Kong, South Korea, Georgia (the nation, not the state), and Norway. In a very preliminary way, I’ll speculate about the possible effects of the presidential election outcomes.
No candidate is going to adopt a platform based on intentionally making it harder to do business. And, no candidate is likely to address the wonky data elements the World Bank uses, like “getting electricity” or “dealing with construction permits,” So, we will have to use broader campaign promises to predict the effects on doing business.
More Regulation vs. Less. When candidates see problems in society, they generally have just a few ways to effect change:
- They can introduce new laws or propose changes to existing laws.
- They can use executive powers to change regulations and enforcement practices.
While the 2020 candidates have not all offered details of how they might regulate businesses, we can look at the platforms of the major ones to see if they appear desire an increase or decrease in the amount of regulations and procedures.
More Unionization vs. Less. Unions can sometimes benefit workers, and in some countries they even operate in a cordial and cooperative manner with management. In the U.S., though, unions tend to make processes more difficult and time consuming for business. They may fight productivity-enhancing changes, protect unmotivated or problematic employees, and prevent rapid realignment of the workforce to market demands. In general, a unionized environment adds friction, i.e., makes business processes more effortful and time consuming.
Which US presidential candidates are friction reducers, and which will make doing business more difficult? #FRICTION #Neuromarketing Click To Tweet
Taxes. As I describe in my book, taxes add friction in two ways. First, there’s the financial drag. Generally, taxing an activity results in less of that activity taking place, at least in the form and location where it is taxed. Second, there’s compliance friction. Taxes that are collected automatically with no forms or filing, like consumer sales taxes, create almost no friction for citizens and business customers. (Merchants DO expend some effort to file and remit the tax collected.) Income and other taxes can create massive compliance friction. The instructions for the U.S. Form 1040, the primary individual income tax form, run over 100 pages.
Health Care. It’s fair to say that there is a lot of friction in U.S. health care. Various forms of private and public health insurance exist, and not all providers work with all payers. Billing can be a nightmare of complexity and error. Some candidates are proposing sweeping changes to the way health care is delivered and financed. It’s hard to estimate what the effects on economic activity would be. Some concepts of a single payer system or “Medicare for all” might get companies out of the whole health care process – shopping for insurance, administering benefits, etc. That would be a big friction reduction. But, if there was an offsetting tax increase, it might exact an economic penalty. Plans that extend Medicare type coverage but leave the current system in place might not change the current level of friction. For now, I’m leaving health care out of the scoring.
Technology Regulation. Some candidates are calling for more regulation of tech companies. Others want to go farther and break them up. Companies like Google, Amazon, Facebook, etc. have been remarkably successful on a global scale. Handicapping (or kneecapping) them would seem to make competing with other international giants like Alibaba and Tencent more difficult while not increasing activity in the U.S. economy. Unless someone convinces me that damaging these business growth engines is good for the U.S. economy, I’ll consider onerous regulation and breakup plans as an increase in friction.
Scoring the Candidates
I’ll consider only the current leaders on the Democrat side and the presumptive Republican nominee here. Feel free to leave a comment with how you would score others, and why. I’ll use a scale of one to five, as follows:
1 – Much more friction.
2 – Somewhat more friction.
3 – No change.
4 – Somewhat less friction.
5 – Much less friction.
These values are in relation to the current status quo, i.e., whether things are likely to become more or less effortful than they are now if a particular candidate wins.
Joe Biden – 2
The current front runner in the Democrat primary polls, Joe Biden, wants to increase corporate taxes but keep them below the pre-2017 levels. He has no position on regulating or breaking up tech companies but is encouraging more investigation. He says he wants to strengthen unions but has not offered specific plans. (Source: Politico)
Bernie Sanders – 1
His clearly-enunciated policies earn self-proclaimed socialist Bernie Sanders the highest friction rating. He want to implement major energy and environmental changes that would affect many businesses. He wants a ban on fracking, the extraction technology that has turned the U.S. into an energy exporter. He advocates breaking up the big tech firms as well as big agriculture businesses. He has in favor of a variety of tax increases for businesses and wealthy individuals. He even wants to add some friction to the financial world by taxing trades. Sanders goes beyond his rivals in supporting unions by promising to double the number of union workers if elected. (Source: Politico)
Elizabeth Warren – 1
Policy wonk Elizabeth Warren, now in a dead heat with Sanders in many polls, also earns the highest friction rating. While many candidates offer platitudes and vague promises, Warren distinguishes herself by offering specific policy proposals for just about everything. Unfortunately for “ease of doing business,” none of them offer less regulation, lower taxes, or other beneficial characteristics. Many of her views coincide with Sanders – banning fracking, breaking up big tech, and bringing back the Glass-Steagall law for banks. While serving in the Obama administration, she built a 1600-employee organization, the Consumer Financial Protection Bureau, to enforce bank regulations. One of her unique policy proposals is a tax on the assets of anyone worth more than $50 million. (Source: Politico)
Donald Trump – 4
If we were scoring for interpersonal friction, current president Donald Trump would be off the charts with his combative tweets and willingness to pick fights with just about everyone. From an economic standpoint, though, he has shown a strong interest in reducing friction. His tax cuts benefitted a broad swath of businesses and individuals, and some of the specific changes (e.g., higher standard deduction) made compliance less effortful for some taxpayers.
Trump’s Executive Order 13771, “Reducing Regulation and Controlling Regulatory Costs,” directed agencies to repeal two existing regulations for every new regulation, and to do it in a way that the total cost didn’t increase. That’s a textbook example of friction reduction, although the long-term impact of this order remain to be seen.
Trump has befriended unions in specific efforts to preserve jobs, but has not enacted policies to favor the growth of unions or increase their sway over businesses.
One area where Trump’s policies have increased friction is the imposition of import tariffs. Permanent tariffs imposed either to protect domestic industries or to raise revenue are pure friction. At the moment, Trump’s tariffs appear to be a temporary measure during trade negotiations.
Of the major candidates, as counter-intuitive as it might seem, Trump is the only one whose policies appear likely to reduce economic friction.
On the Democrat side, long shot Andrew Yang might be the low-friction choice. Previously an entrepreneur who ran an test prep company, Yang is the only candidate who advocates a value-added tax (VAT) like those in Europe along with taxing financial transactions. If these replaced more cumbersome taxes, compliance friction might go down. Then again, taxing economic activity adds financial drag to those activities.
Comments and Cautions
- This article looks at a single dimension – how candidates might add or subtract from the ease of doing business in the U.S. and how that might affect growth of the economy. Obviously there are many other lenses to use in comparing candidates. In no way is this an endorsement of any candidate. I’d like to see EVERY candidate talk about how their policies will help entrepreneurs and grow economic activity in the U.S.
- Just because presidential candidates says they favor specific actions doesn’t mean those things will happen even if they win the election. Laws are written and passed by Congress. Executive orders are challenged in drawn-out legal proceedings. Ambitious plans are often abandoned when reality sets in. No president ever delivered on all of his campaign promises once in office. Some of those promises may have been merely pandering to voters. But, even with the best of intentions, there’s a lot the president can’t control.
- This preliminary comparison of a few leading candidates is in no way an exhaustive analysis. There are more than twenty total contenders, and most of them are evolving their positions as the primaries get closer.
- In no way am I suggesting that the best business environment is an absence of regulations or enforcement. In FRICTION, I make the point that there is an optimal level that provides protection for both parties to a transaction and that provides a sound legal framework for businesses and citizens. A complex bureaucracy is bad, but anarchy can be even worse.
- My calling taxes “friction” isn’t a criticism of all taxation – just a recognition that in most cases you can’t tax something without changing the behavior of those being taxed.
- My calling tax compliance “friction” IS a criticism. In the U.S., tax law is incredibly and unnecessarily complex. The majority of taxpayers shouldn’t need software or professional help to file their income taxes. And, how can a wealthy person pay no income tax at all? Often, it’s because they are engaging in activities that lawmakers voted to reward with no taxation or even tax credits. (Tax something less, and you’ll get more of it!) It’s entirely possible that a simpler system would not only be easier for all taxpayers but would increase revenue in an equitable manner.
- This is a narrow point of comparison and isn’t meant to capture the range of policies that fall under the president’s purview. Social issues, foreign policy, defense, etc., are important but aren’t considered here. My friction focus looks at the effort and money businesses and individuals expend to perform regulated tasks, comply with laws and regulations, etc.
I consider this to be a work in progress. Here are a few questions:
- Are there other friction-related policies that should be included in this comparison?
- Do you agree with my initial scoring?
- Do any other candidates stand out as being high or low friction?
- What policies would make it easier to do business in the U.S. that none of the candidates are talking about?
Leave a comment with your thoughts!
- Related: Scoring Presidential Debates with Neuromarketing Tools – Duane Varan
The US is the #8 country for ease of doing business. Which 2020 candidates will push the US closer to #1, New Zealand? #FRICTION #Neuromarketing Click To Tweet