EN Korea (한국) Institutional
Macroeconomic & Geopolitical

Just How Crazy Are These Democratic Ideas?

15 March 2019 - 4 min read

The field of Democratic presidential candidates is growing increasingly crowded, leaving investors wondering about the best way to interpret the steady stream of grand economic plans filling the headlines.

As new Democrats enter an increasingly crowded field of presidential candidates (and two prominent names dropped out), investors may be wondering just how best to interpret the steady stream of grand economic plans spilling into the headlines.

THREE THINGS TO BEAR IN MIND:

Primary campaigns on both sides produce the most extreme ideas that either party has to offer The last person to win the White House did not run a campaign of moderation or well-honed policy proposals Few campaign promises ever get enacted But, of course, some promises do survive, and it’s important to follow a debate that seems to be tugging government policy to the left. Even if President Trump wins again, there will likely be more government involvement in American economic activity than under his Republican predecessors. Here’s a quick primer for the debate ahead:

“Even if President Trump wins again, there will likely be more government involvement in American economic activity than under his Republican predecessors.”

MODERN MONETARY THEORY:

Long buried in the recesses of academia, this brash idea has suddenly broken into the business news channels. In fact, proponents of this “modern” idea trace its roots to debates around the nature of money and the gold standard in the early 20th century. The premise is fiscal policy has more impact than monetary policy, since money has more impact as it enters the economy through government spending and leaves via taxes. Governments, the theory goes, can spend as much money as they like without causing inflation as long as they don’t start competing with private spending on the same goods and services. Thus, governments can—and should—spend as much as they can in order to achieve full employment. The theorists argue that their framework does a better job explaining current low rates in spite of massive deficits. These are ideas that are naturally attractive to Vermont Senator Bernie Sanders, but most mainstream economists—including key Democratic Party stalwarts—have denounced it as snake oil. Odds are these ideas will remain on the fringe of economic thinking for now, but humility requires remembering that similar things were said about radical notions like deficit spending, fiat currency and flexible exchange rates.

THE ACCOUNTABLE CAPITALISM ACT:

Introduced by Massachusetts Senator Elizabeth Warren last year, this bill seeks to “eliminate skewed market incentives” that she argues lead corporations to think exclusively of profits without regard to languishing incomes of America’s middle class. Despite the stridency of her rhetoric, Warren has a sophisticated understanding of financial markets and corporate law. Her bill would give corporate directors the legal cover to act in the interest of a broader group of corporate stakeholders—including workers—rather than maximizing shareholder profit alone. The bill would also require corporate political contributions to be approved by 75% of shareholders. Again, few of these proposals will make it into law, but after the Trump administration’s focus on deregulation, the debate will increasingly focus on the proposition that everyone does better when corporations are less constrained.

SHARE BUYBACK LIMITATIONS:

Along the same lines, Sanders and New York Senator Chuck Schumer have endorsed a proposal to limit corporate share buybacks until companies have met “minimum requirements for reinvestment in workers and the long-term strength of the company.” The logic will look especially strained to most students of corporate finance and likely raise a long list of questions about how these thresholds will be measured. Still, you will recognize the pattern and start to hear echoes from Republicans as well. Florida Senator Marco Rubio has embraced higher capital gains taxes for much the same purpose: encourage more spending on research and development over buybacks. Of course, his motivation is better competition with China, but the impact on equities may have little difference.

THE GREEN NEW DEAL:

Worries about climate change unite most Democrats, but only a few have fully embraced this joint Congressional resolution submitted by Massachusetts Senator Ed Markey and New York Representative and rising star Alexandria Ocasio-Cortez. Their ten-point plan calls for an “economic mobilization” that would phase out carbon emissions, build domestic infrastructure and expand the social safety net. More of a rallying cry than a piece of legislation, the text stresses government investment in clean industries above regulating carbon emissions. Cost and vagueness notwithstanding, the document sets the outside frame in which climate policy will be debated among Democrats. Closer to the center will be policies advanced by Michael Bloomberg, who withdrew from the race while shifting focus to his campaign to retire all coal-fired power plants in the next 11 years. 

MEDICARE FOR ALL:

A single-payer health care system is hardly new nor are bills introduced under this name in prior congresses. The latest version, however, is among the more expansive interpretations—eliminating both private employer offered insurance and out-of-pocket health care expenses and subsidizing prescriptions. Opponents ask about the price tag, which they see as impossibly high, but supporters argue that there is money to be reallocated since the U.S. health care system already spends more per capita than any other developed country—with generally worse outcomes. It’s clear that this version will never advance far, but with President Trump calling for caps on drug prices, pharma stocks may still be in for more uncertainty. 

And that is precisely the point. Even as Democrats toss around proposals that would lead to more government involvement in economic activity, the likely Republican nominee has stolen key elements of their traditional platform to rally blue collar voters. Amid this push for tax cuts and deregulation, he has also warmed to protective tariffs, higher wages and more government infrastructure spending. He has also never shied away from calling out corporate managers he thinks are behaving badly.

As difficult as the lives of corporate managers have become in recent years, they may just have lived through their best two years in a long time.

“As Democrats toss around proposals that would lead to more government involvement in economic activity, the likely Republican nominee has stolen key elements of their traditional platform to rally blue collar voters.”

Any forecasts in this material are based upon Barings opinion of the market at the date of preparation and are subject to change without notice, dependent upon many factors. Any prediction, projection or forecast is not necessarily indicative of the future or likely performance. Investment involves risk. The value of any investments and any income generated may go down as well as up and is not guaranteed by Barings or any other person. PAST PERFORMANCE IS NOT NECESSARILY INDICATIVE OF FUTURE RESULTS.

Read More Less

Any investment results, portfolio compositions and or examples set forth in this material are provided for illustrative purposes only and are not indicative of any future investment results, future portfolio composition or investments. The composition, size of, and risks associated with an investment may differ substantially from any examples set forth in this material No representation is made that an investment will be profitable or will not incur losses. Where appropriate, changes in the currency exchange rates may affect the value of investments. Prospective investors should read the offering documents, if applicable, for the details and specific risk factors of any Fund/Strategy discussed in this material.

Barings is the brand name for the worldwide asset management and associated businesses of Barings LLC and its global affiliates. Barings Securities LLC, Barings (U.K.) Limited, Barings Global Advisers Limited, Barings Australia Pty Ltd, Barings Japan Limited, Barings Real Estate Advisers Europe Finance LLP, BREAE AIFM LLP, Baring Asset Management Limited, Baring International Investment Limited, Baring Fund Managers Limited, Baring International Fund Managers (Ireland) Limited, Baring Asset Management (Asia) Limited, Baring SICE (Taiwan) Limited, Baring Asset Management Switzerland Sarl, and Baring Asset Management Korea Limited each are affiliated financial service companies owned by Barings LLC (each, individually, an “Affiliate”).

NO OFFER: The material is for informational purposes only and is not an offer or solicitation for the purchase or sale of any financial instrument or service in any jurisdiction. The material herein was prepared without any consideration of the investment objectives, financial situation or particular needs of anyone who may receive it. This material is not, and must not be treated as, investment advice, an investment recommendation, investment research, or a recommendation about the suitability or appropriateness of any security, commodity, investment, or particular investment strategy, and must not be construed as a projection or prediction.

Unless otherwise mentioned, the views contained in this material are those of Barings. These views are made in good faith in relation to the facts known at the time of preparation and are subject to change without notice. Individual portfolio management teams may hold different views than the views expressed herein and may make different investment decisions for different clients. Parts of this material may be based on information received from sources we believe to be reliable. Although every effort is taken to ensure that the information contained in this material is accurate, Barings makes no representation or warranty, express or implied, regarding the accuracy, completeness or adequacy of the information.

Any service, security, investment or product outlined in this material may not be suitable for a prospective investor or available in their jurisdiction. Copyright in this material is owned by Barings. Information in this material may be used for your own personal use, but may not be altered, reproduced or distributed without Barings’ consent.

19-769388

X

We use cookies on our website to provide you with the best experience. By proceeding to our site you agree to our Cookies Notice and our site Terms and Conditions.