Will Our Political Divide Cause A Recession?

Americans' confidence in the economy is down slightly this month, according to a poll measuring consumer sentiment. Nothing serious.

But the poll’s underlying implications are more serious than a slight downturn: Consumer sentiment is divided between Republicans, who are buoyant over the recent election, and Democrats who are angry and fearful.

This is potentially troubling for our economy because the counties that voted Democrat in Election 2016 account for two-thirds of our nation’s annual gross domestic product (GDP). What happens if Democratic consumers, or our country's invaluable immigrant entrepreneurs, turn bearish? Could this trigger a recession?

A nation divided economically

Our country is not only divided on our politics. We are also divided by our economic productivity.

America’s oil patch offers a telling example. The falling price of oil sent six out of America’s top eight oil states into an economic recession. California and Texas are the two that avoided this fate. California’s economy is booming from its global tech leadership. And Texas’s diversified economy, including its spot as our nation’s largest wind power producer, enabled it to barely avoid recession.

This economic divide goes a long ways toward explaining our political divide. Coal country voted overwhelming for Republicans. Silicon Valley voted overwhelmingly for Democrats.

The threat to our economy is if this political divide begins to show up in business decisions and consumer purchases.

The disruptive impacts created by the demise of the Industrial Age

The end of the Industrial Age is at the core of our economic and political divide. The Industrial Age is ending as its technologies, fuels, and business models lose on price to the future tech of artificial intelligence, the Internet of Things, renewable energy and batteries.

Coal is a telling example. Utility-scale solar now produces electricity at a lower cost per kilowatt-hour than coal-fired power plants. Price-competitive batteries and net zero energy buildings are future tech's next wave. They will crush coal power plant economics. Political efforts to protect price competitiveness by dismantling environmental regulations like the Stream Protection Rule may indeed lower the cost of coal. But this will not save coal from solar, batteries and smart buildings slashing the consumer demand for coal-fired power plants.

The smart factory is the terminal threat to the Industrial Age and its manual laborers (in the U.S. and around the world). FoxConn, the China-based iPhone manufacturer, is a prime example. The company just laid off 60,000 Chinese factory workers by replacing them with robots.

What has been lost in politics is that America is a smart factory manufacturing leader. Our smarter factories are producing twice as much as we manufactured in 1984 while using a third fewer workers. This trend will accelerate as smart machines become smarter and more interconnected.

What if consumers and businesses use politics to make economic decisions?

The recent consumer sentiment report hints at a potential economic future where consumer and business behavior reflect our political divide. The implications are threatening to our economy and jobs.

For example, half of America’s startup businesses valued at over $1 billion were founded by immigrants. Our economy would be materially damaged if these entrepreneurs went to China, India, the Middle East, Canada, Latin America or Europe to realize their potential. And our economy would be materially damaged if potential immigrants no longer saw America as a country receptive to their business dreams and technology innovations.

And if the consumers who account for two thirds of our country’s GDP begin to express their political frustrations at the cash register, the economy could suffer even more. Grab Your Wallet is an online spreadsheet that lists stores carrying Trump-branded products and companies that advertise on sites closely aligned with President Donald Trump. Grab Your Wallet calls for consumers to boycott these products and companies. Is this the reason behind the report that first daughter Ivanka Trump’s clothing line has seen a 26 percent decline in January sales?

What if this activism spreads and consumers begin making economic decisions based on politics? Imagine Southern Republicans not buying iPhones and Silicon Valley consumers boycotting BMWs built in South Carolina. Our national economy would suffer, and Americans would lose their jobs.

Will America’s political divide cause a recession?

As an economist, I am worried. America united has created the world’s largest economy. Our free markets, with bumps and bruises along the way, have created the world’s most successful entrepreneurs and companies. No country has been able to innovate with the speed and success of America.

What could kill this golden goose?

It could be us voting with our wallets to reflect our political divide.

Image credit: Flickr/Culinary Union