Macroeconomic & Geopolitical

Keep Your Eye on the Loser

August 2020 – 3 min read
The election’s winner will drive market sentiment for the next several months, but the loser could reshape economic policy for the decade.

In this brief lull between America's two main presidential conventions, the country’s political tectonic plates are shifting even in these freeze-dried, online versions without falling balloons, cheering crowds and silly hats.

As financial markets hurtle upwards on the strength of central bank liquidity and vaccine headlines, investors may pause over the next few months to handicap changes in tax and regulatory policy that could affect next year’s earnings. But anyone trying to get a sense of the future of U.S. economic policy should spend less time on the likely victor and think hard about the party headed for defeat.

The election winner—in either case—will govern for the next four years astride a party that is increasingly restive, uncertain and splintering. The loser, however, will head into a period of denial, anger, bargaining, depression and acceptance that could trigger a redesign far more consequential for America’s long-term economic outlook. 

The polished Democratic unity on display at its convention spoke more to fervent opposition to President Donald Trump than to shared vision on policy. On economic issues alone, they have papered over significant differences on the government’s role in markets, the best approach to climate change or how to generate jobs in a globalized and data-driven economy. 

A defeat on November 3 will likely lead progressive Democrats to conclude that even more radical ideas are required to mobilize disheartened voters, leaving moderates who have yet to embrace Modern Monetary Theory to resist extremism. 

Meanwhile, Trump's successful takeover of the Republican Party in the last four years may trigger an even bigger identity crisis if he loses. Does the party draw more energy from its populist wings that backed trade confrontation, cheered corporate browbeating and ignored soaring deficits? Or does it return to its Ronald Reagan roots, with a recommitment to free trade, a renewed faith in markets and at least an aspiration to balance budgets?

Suspicious minds may wonder if Congressional Republicans who currently oppose new stimulus measures might be burnishing their reputations as fiscal hawks while the Trump poll numbers sag.

Political parties naturally evolve with the times and with the electorate. It’s easy to blame shrill political debates on a single politician or event, but the racial and educational gaps between the parties have been widening for decades, due in part to immigration from Asia and Latin America and a booming college population. In 1980, some 76% of Republican voters were white and without a college education, compared to 60% of Democratic voters. In the last presidential election, white non-college voters had slipped to 60% of Republican support but plummeted to less than 30% of Democrats.


Source: Brookings. As of April 2018.

These entrenched differences have only been aggravated by redistricting, campaign finance laws and a fractured media landscape that all reward extreme ideas. Even if there were historical precedent for a third, moderate party to emerge, it seems even less likely in the current environment.

How these differences will play out for economic policy is much trickier to predict.

Early in the 20th century, for example, Republicans leaned more to protectionism, eager to defend infant industries in the Northeast. Many Democrats, speaking on behalf of rural interests looking for foreign markets, were then the party of free trade. After vigorous opposition to most free trade deals in recent decades, we may be on the verge of another switch, with more Democrats thinking that trade creates jobs and Republicans turning more skeptical.

“The key question for anyone struggling to glimpse the future of American economic policy will be the losing party’s attempt to woo moderates from the other side in a system that does so little to reward compromise.”

On economic inequality, nearly 80% of Democrats believe there is too much, compared to 41% of Republicans. Interestingly, however, Republicans split by income, with 48% of low-income party members concerned about it. These are fissures that could drive policy change for a party that is increasingly dependent on non-college white voters. 

The key question for anyone struggling to glimpse the future of American economic policy will be the losing party’s attempt to woo moderates from the other side in a system that does so little to reward compromise.

Will a losing Republican party tilt economic policy more toward the Trump base that remains its most enthusiastic supporters? Or will it cater to moderate Democrats who are aren’t quite ready for the Green New Deal and Medicare for All, let alone other Democratic priorities on legal and social issues.

Conversely, if the Biden campaign falls short, will Democrats continue their shift to the left on taxes and regulation? Or will they see opportunity to cement a more lasting grip on power as they reach out to disaffected centrist Republicans?

With the world’s attention focused on the first 100 days of the next administration, don’t forget, these are the questions the losers will decide.

Christopher Smart, PhD, CFA

Chief Global Strategist & Head of the Barings Investment Institute

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