Commentary: With the Democrats firmly in charge in the US, we can look forward to economic gains
A positive outcome of the Democratic blue wave is the possibility of more fiscal stimulus and government spending, which augurs well for the US and world economy, says OCBC’s Vasu Menon.
SINGAPORE: The outcome of the US Senate runoff in Georgia at the start of 2021 marked a turning point in US politics which could have significant implications for the US economy and global stock markets.
The Democratic party, which had not won a Senate race in Georgia in 20 years, surprised markets by securing the two seats in the state. In the process, it gave the Democrats control of both chambers in the US Congress and President-elect Joe Biden the ability to bring about policy changes.
The S&P 500 index rallied 3.4 per cent during the week of the Senate race in Georgia in response to a Democratic victory in the state.
One positive outcome of the Democratic blue wave is the possibility of more fiscal stimulus and government spending, which augurs well for the US economy and indirectly the world economy.
MORE STIMULUS AND SPENDING
Biden has just proposed a sizeable US$1.9 trillion stimulus package to give the pandemic-hit US economy a lift.
This is on top of a smaller US$900 billion stimulus package that Congress approved last month. Biden has also indicated plans to spend significantly on longer term initiatives that will combat climate change and result in infrastructure and clean energy investments, all of which will create millions of middle-class jobs in America.
The gridlock in the US Congress has affected the ability of the Democrats to push for greater government spending to support the pandemic-riddled economy.
Before Congress agreed on the US$900 billion stimulus package in December, the Democrats had wanted a much higher spending plan of US$2.2 trillion.
However, the Democrats faced roadblocks from Republicans who enjoyed a majority in the Senate. Consequently, the Democrats had to settle for a much smaller package of US$900 billion.
With a Democratic clean sweep following the elections in Georgia, decisive fiscal action is now possible, and it will help to accelerate economic recovery.
Recent weak US employment figures highlight the necessity for fiscal stimulus.
US employment has been declining for five straight months and even fell by 140,000 in December, the first decline in payrolls in eight months. Initial jobless claims, another measure of US employment, also surged by 181,000 to 965,000 in the week ended Jan 9, pointing to a weak US job market due to COVID-19.
The Republicans had opposed aid for state and local governments, but the Democrats will now be able to pass a package that includes this.
The Senate also refused to vote on a House measure to boost stimulus checks to US$2,000 from US$600 in December last year. That could now go ahead as well. More unemployment assistance and health care measures could also be in the cards.
BIDEN MAY SHAKE THINGS UP
On the other hand, the markets had fears about Biden’s economic agenda involving sweeping policy changes.
Even if Biden tries to push through some of his plans for reforms, he may not succeed given the razor thin margin the Democrats have in the Senate and the ideological divide within the Democratic party.
It is a wide ideological spectrum stretching from a Social Democrat like Senator Bernie Sanders all the way to a fiscal conservative like Senator Joe Manchin, who has said that he is against the idea of his party using their majority to quickly muscle through sweeping changes.
His unequivocal stance against ending the filibuster means that Biden will need substantial Republican support for big legislative and regulatory changes.
The Republican party with its minority position in the Senate can use the filibuster to debate a piece of legislation endlessly, hence delaying or preventing a vote on a bill.
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The Senate requires 60 votes to end the filibuster or cut off debate on most measures and force a final vote on a piece of legislation.
However, a Democrat-majority in the Senate could muscle its way by overriding the existing procedural rule with a simple majority.
So, with 51 votes, Democratic Senators can eliminate the filibuster procedure entirely, such that they will be able to pass any major policy changes and legislations with a simple majority in the Senate. However, without Manchin’s support this will not be possible.
POLITICS STILL MATTERS
On the flipside, Biden may also be reluctant to push through any major and controversial reforms which may be perceived as negative for the economy in the next two years, as mid-term elections are due in two years’ time.
He may not want to do anything too drastic which could cause the Democratic party to lose its majority in Congress, like it did two years after then-President Barack Obama took office in 2008.
Even if Biden succeeds in raising taxes for some reason, the net effect may still be expansionary and good for the economy if the purpose of the tax hikes is to fund greater government spending.
After all, tax revenue appears on just one side of the fiscal ledger. Aggregate spending also matters, especially in a demand deficient economy.
Fiscal policy aside, monetary policy will also benefit with Biden in charge and the Democrats firmly in control of Congress.
Unlike the Trump era, the Federal Reserve (Fed) is unlikely to face much political pressure from the Biden administration.
In fact, monetary and fiscal policy may work in greater harmony as Fed chief Jerome Powell and incoming Treasury Secretary Janet Yellen – who is Powell’s predecessor at the Fed - have a long history of working well together.
Powell was nominated to the Board of the Fed in 2012 where he worked with Yellen for nearly six years when she was initially a vice-chair and then chair.
cabinet and other political appointments are much more likely to win swift confirmation.
Being able to assemble the team he desires without many hurdles will allow Biden to move forward quickly with his plans to fight COVID-19 and help the economy to get back on its feet.
It will also allow him to push forward with other initiatives like investments in infrastructure, climate change and clean energy which will create jobs and benefit the economy.
In a nutshell, the economic and political benefits from a more stable political environment in the US, could augur well for global stock markets which may continue to enjoy more upside in 2021.
Nevertheless, the road ahead may not be a smooth path. The new normal heralded by COVID-19 means that investors must be prepared for continued volatility and intermittent pullbacks.
Vasu Menon is Executive Director of Investment Strategy at OCBC Bank.