President Trump’s executive order temporarily banning travel from certain countries is certainly a hotbed issue, and it goes without saying that everyone has a strong opinion on the matter. I have neither the expertise nor the desire to discuss the political and legal ramifications of the travel ban. However, as this is a financial column, there is one aspect of the matter that I do think is worth discussing as it may have an impact on the markets and your portfolios. That is the notion that such executive orders as Mr. Trump’s may test our nation’s dedication to the rule of law, and, by extension, threaten the stability of our financial markets.
Both Bloomberg’s Matt Levine and Ritholtz Wealth’s Josh Brown broached this topic yesterday. Mr. Levine writes:
“The reason the U.S. is a good place to do business is that, for the last 228 years, it has built a firm foundation on the rule of law. It almost undid that in a weekend. That’s bad for business.”
Mr. Brown adds:
“Put simply, US stocks, bonds, and real estate are the most trusted and relied upon financial “risk assets” on planet earth. We have strong contract law and, as a result, people all over the world allocate to these instruments with confidence. We should not take this for granted or fool ourselves into believing it’s permanent.”
These points are undoubtedly true, but it is worth pointing out that over the course of our nation’s long history, there were countless instances where the executive branch overstepped its legitimate authority, and was subsequently rebuked by the courts. As Garland Tucker wrote in 2015:
“Presidential overreach…is not a new issue. Indeed, the debate over limited versus expansive government is as old as the Republic itself…Constitutional battles have raged down through American history. Various issues such as the Bank of the United States, tariff legislation, the expansion of slavery, the federal income tax, anti-trust policy, social welfare legislation, and many wartime-related policies have all involved allegations of governmental expansion and potential overreach. And all have been ultimately settled before the Supreme Court.”
Some of the most dramatic examples of abuse by the executive branch occurred during the tenure of President Franklin Roosevelt who was especially aggressive in his use of executive powers. He used the Internal Revenue Service to go after former Treasury Secretary Andrew Mellon and other political opponents, and, perhaps most notoriously, issued an executive order that led to over 120,000 Japanese-Americans – most of whom had lived in the United States for decades – being forcibly removed to internment camps.
Less well known, however, is that the Roosevelt administration involved itself in the day-to-day workings of the economy, from criminalizing possession of gold, to myriad interventions in the minutiae of agriculture. The National Industrial Recovery Act (NIRA), a project of Roosevelt’s, regulated even how customers could select the chickens they purchased for consumption, which resulted in a challenge that had to be settled in the Supreme Court. In fact, the Supreme Court was such a break on Roosevelt’s overreach that he attempted to “pack” the Court with nominees of his choosing. Ultimately, the rule of law prevailed, albeit at great cost in lost economic output.
The Truman administration also met an obstacle in the Supreme Court when it seized the assets of the steel industry in 1952. This action, which was called “usurpation of power without parallel in American history,” was nullified by the Supreme Court in Youngstown Sheet & Tube Co. vs Sawyer, and control of the companies was returned to the owners.
Most recently, during the Obama administration, the Environmental Protection Agency’s attempt to bypass Congress and the states in an attempt to regulate the energy economies of the states was blocked by the Supreme Court.
To say that the United States is a bastion for the rule of law is not to say that here there will not be challenges to it. In fact, I would argue that challenges to the rule of law further strengthen it, the same as one’s physical constitution is strengthened through exertion. In a recent conversation, my friend, Sam Lee, pointed out that vociferous opposition to the party in power is actually a sign that the system is working. It is usually when there is consensus about a political leader or policy that institutions become more vulnerable to decay and abuse.
It is worth noting that, despite a great deal of political turmoil since 1900, both equity and fixed-income markets in the US generated some of the highest real returns globally, per Credit Suisse. But we should not assume our inheritance lightly. Vigilance is required. The institutions that have made this success possible are, as Mr. Brown points out, not permanent absent our ability and desire to maintain them. Human nature is immutable, and those in power, regardless of party, will attempt, as they always have, to overreach the lawful bounds of their authority.
“Laws cannot rekindle an extinguished faith, but men may be interested by the laws in the fate of their country. It depends upon the laws to awaken and direct the vague impulse of patriotism, which never abandons the human heart; and if it be connected with the thoughts, the passions, and the daily habits of life, it may be consolidated into a durable and rational sentiment. Let it not be said that it is too late to make the experiment; for nations do not grow old as men do, and every fresh generation is a new people ready for the care of the legislator.”
