5-10-17 Business by Carlson

Content provided by Paul Vaaler of the Carlson School

In case you missed it, Here’s today’s Podcast!

I know we call my weekly chat with WCCO Radio’s Dave Lee “Business by Carlson” but this week I think Dave and I should rename it as Politics and Business by Carlson. This week has seen some fascinating political trends with important near-term business implications. Here are three examples:

1) Internationally: Last Sunday’s French presidential run-off election saw the resounding victory of centrist, pro-European Union, pro-international business candidate Emmanuel Macron. He took 67% of the vote against right-wing, anti-EU, nationalist and anti-immigrant candidate Marine Le Pen. It should have been a big positive for French and international equity, debt and currency markets for the Euro. But it wasn’t. Here’s where you can learn more about the big market yawn after Macron’s victory: http://www.businessinsider.com/european-stock-markets-emmanuel-macron-victory-2017-5. Here’s why markets yawned. Macron’s victory was expected. Two weeks earlier, the upstart outsider –the 39 year old has never held public office– eked out first-place plurality of votes in the first round of voting. Le Pen was second. Macron’s first round victory sent markets soaring more than 4% in France and more than 2% here in the US because that was a pleasant surprise. But this second and final victory was already “in the bag” for markets in France and around the world. So yawn. But now it gets interesting. In a month’s time, France holds legislative elections. Macron’s “En Marche” (Get Moving) party currently has 0 candidates selected. 0. Macron needs to register those candidates and then get them elected in sufficient numbers to help guide his economic policies designed to get the country growing and unemployment decreasing. If he doesn’t do that, then markets will be surprised again, and it won’t be a pleasant one.

2) Nationally: Yesterday afternoon’s decision by President Donald Trump to fire FBI Director James Comey is another political bombshell. The new Deputy US Attorney General Rod Rosenstein wrote and published a 3-page memo criticizing Comey’s handling of the Clinton email investigation in 2016. Here it is:http://www.baltimoresun.com/news/maryland/politics/bal-rod-rosenstein-fbi-memo-20170509-htmlstory.html. US Attorney General Jeff Sessions read it and recommended to President Trump that he fire Comey. And Trump fired Comey. Democrats and a few Republicans on Capitol HIll think the timing of that decision is linked to Comey’s FBI investigation of possible Trump campaign links to the Russian government and its interference in the 2016 US presidential race. Critics are likening it to Nixon’s October 1973 firing of special prosecutor Archibald Cox, the so-called Saturday Night Massacre. Here’s a reminder of that 44 year old story: http://www.washingtonpost.com/wp-srv/national/longterm/watergate/articles/102173-2.htm. So how have markets responded to this national political bombshell? So far, it’s with another yawn. The stock market is quiet, the US dollar is steady. When Nixon fired Cox, the market tanked the same day, but that was also because several Arab countries also announced their oil boycott of the US in the wake of our support for Israel in the Yom Kippur War. But what about the firing and near-term business prospects? I think those prospects are nothing but negative, because political controversy takes attention away from economic policy initiatives. It re-directs committee time that could work on healthcare revision, tax reform, deregulation, infrastructure funding. Especially in smaller legislative bodies like the 100-person Senate. I think this piece by CNBC has it right: http://www.cnbc.com/2017/05/09/comey-firing-raises-concern-that-trump-pro-growth-agenda-could-be-slowed-even-more.html. The firing is a side-show that will captivate Capitol Hill for the next month and delay the Trump business agenda for at least that long. If you are a Trumpist then you fret about this loss. If not, well…

3) Locally: Another local political development merits mention for its business implications. Last Monday, Governor Dayton signed into law HF400, a bill barring the state of Minnesota from engaging in business contracts with companies or organizations who boycott Israeli companies. Here’s an article about that event: http://www.brainerddispatch.com/news/politics/4263172-dayton-signs-kreshas-anti-boycott-bill. And here’s the text of the bill: https://www.revisor.mn.gov/bills/text.php?number=HF400&version=4&session=ls90&session_year=2017&session_number=0. It might seem like a noble thing to pass a law mandating that state vendors refrain from discriminating against Israel. But noble political intentions can still lead to bad business and legal outcomes. Watch for both with this bill, which makes it illegal for any state vendor to take an action that “intended to limit
commercial relations with Israel…” That is really broad language, maybe too broad. Take Delta Airlines, the biggest air carrier in Minnesota and a big state vendor. They are the leader of the SkyTeam alliance, which also includes Saudi Arabia’s state-owned airline Saudia. Saudi Arabia doesn’t recognize Israel. Saudia won’t fly to Israel, doesn’t even depict Israel on its route maps, and won’t let anyone board a Saudia flight using an Israeli passport. I think it’s safe to say that Saudia does its best to decrease commercial relations with Israel. Well, Delta shares lounges with Saudia passengers, shares booking systems with Saudia, coordinates the hand-off of luggage with Saudia, recognizes frequent-flyer program awards from travel on Saudia. The details are here in this study I wrote with my Carlson School colleague, Joel Waldfogel: https://papers.ssrn.com/sol3/papers.cfm?abstract_id=2912489. I’m pretty sure that Delta”s doing all of this intentionally. You could say that Delta is accommodating Saudia’s discriminatory behavior towards Israel. I find it all repugnant, but not illegal. I expect Delta or another firm in a similar situation to challenge the constitutionality of this new bill, and fast. There’s a good chance that firm will win in court and get state taxpayers to pay for court costs and attorneys fees. This recent Harvard Law Review note lays out the reasoning why: http://harvardlawreview.org/wp-content/uploads/2016/05/2029-2038-Online.pdf. I detest discrimination against anyone for any reason. But this bill may do little to fight discrimination because it is overly broad in scope. All it might do is hurt the state business climate and prompt some costly lawsuits.

Politics and business make for an interesting mix locally, nationally, and internationally.

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