Wednesday , January 20 2021

Democrats are now the pro-business party

In a week when Democrats won two US Senate seats in Georgia to gain control of Congress, financial markets affirmed a view already prevalent on Wall Street: that Democrats are the best party to get the economy out of its growth slump.
This is a shift from prior decades because of the specific circumstances of the economy in 2021. And it may not last for long given the competing tensions within the Democratic Party. But for at least the next couple of years, it could result in a Goldilocks policy environment. Just as in the days preceding the presidential election in November, markets were braced for the potential “blue wave” that would deliver Democratic control in Washington — a scenario the Georgia Senate runoff actually accomplished.
For the week, 10-year Treasury yields rose by 0.19%, the largest weekly increase since early June, and the KBW Nasdaq Bank Index rose by 8.6% on the anticipation of faster economic growth.The explanation for this new economic narrative is straightforward.
Republicans scored decades of policy achievements by lowering taxes and restraining inflation. What’s needed to drive higher levels of economic growth now is more government spending, which can kickstart a cycle of hiring, investment and consumer spending. How much spending will it take?
Nobody knows for sure, but the best way to figure out when we’ve done enough — or that spending has become a problem — is to monitor inflation and longer-term interest rates, not the size of the national debt or federal budget deficits. Investors believe Democrats are more committed to doing that than Republicans.
The Democrats’ pro-growth agenda is part of a demographic reordering of the two political parties over the past several years. Under former President Barack Obama, the urban-rural divide widened, with cities becoming more Democratic and rural areas becoming more Republican. Under President Donald Trump, that geographic divide expanded to metro areas as a whole, with suburban areas shifting to Democrats while rural areas grew even more Republican. An education divide opened up as well, with college-educated voters becoming more Democratic and non-college-educated voters becoming more Republican. The net effect of those shifts gave President-elect Joe Biden victories in counties comprising more than 70% of the nation’s economic output. In particular, areas showing strong population and economic growth tilted blue. So to the extent either party has economic growth in its self-interest, it’s the Democrats.
While there are other rising voices within the Democratic Party seeking to enact policies less favourable to economic growth — such as raising taxes or taking government spending to such worrisome levels that inflation becomes a concern — the votes to pursue that more extreme agenda likely won’t exist when Democrats have only a one-vote advantage in the Senate and a slim majority in the House. The Democrats are inherently a coalitional party, and their current numbers probably give them enough votes to enact policies that will boost growth, but not enough for moves that will hurt the economy.
At the same time, Republican priorities are shifting away from economic growth. Trump deviated from his party predecessors both by opposing immigration and starting economy-damaging trade wars. More recently, it’s unclear whether the party is going to have any kind of policy agenda whatsoever as it delves deeper into conspiracy theories rather than focuses on traditional business interests.
For investors, the hope is that the economic agenda that Biden is expected to lay out for action over the next several months will help the economy recover not just from pandemic, but also from years of under-investment in infrastructure and a labor market that too often has been far from full employment. Perhaps by the 2022 midterm or 2024 presidential elections, there will be a more balanced view over which party is better for the economy. But for the time being, investors believe that a blue Washington means they’ll be seeing green in their portfolios.
—Bloomberg

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