Deep purple?

Key points

• If after the January 5th run-offs in Georgia the Democrats still don’t control the Senate, President-elect Biden will have to try to follow a “purple pathway” on economic policy to address “secular stagnation”. We think such strategy – combining public investment, tough competition policies and market-based approaches to decarbonization – exists but collides with the polarization of both parties.

Joe Biden’s conciliatory victory speech has probably comforted equity investors in their positive reaction to the Democrats’ failure (for now) to take control of the Senate, thus keeping in check the most radical aspects of the Democrats’ platform on regulation and tax. The market is focusing now on the chances of a quick fiscal push. Some encouraging signals came from the Republican majority leader in the Senate on a stimulus by year end, but the package would likely be much smaller than what the Democrats expected, and a lack of cooperation from the White House – as we are writing these lines Donald Trump still has not conceded – would not help to get anything during the transition.

The situation may change on January 5th with the two run-off Senate elections in Georgia. The Democrats still have one shot at snatching a majority in the upper house, but we note that Joe Biden has been able to win Republican-leaning voters who did not extend their rejection of Donald Trump’s personality to supporting liberals in Congressional races. Mobilisation may be an issue for the Democrats in January with the incumbent President on his way out. We would retain a divided Congress as our baseline.

Beyond the immediate fiscal issue, we think that the capacity to fight “secular stagnation”, which implies reviving productivity and innovation, should ultimately be the right gauge to the success of Joe Biden’s presidency in the economic realm.  In principle, a “purple pathway” should be possible, blending the Democrats’ fondness for infrastructure investment with tough competition policies and market-based approaches to the decarbonization of the economy which would appeal to moderate Republicans. There is probably no Democrat better equipped than Joe Biden to deal with a divided Congress and cut deals along those lines. Still, this is a narrow path, given the polarization of the base of each party. If the centrist avenue is blocked, the result may well be policy paralysis.

We also look at the first ripples Biden’s victory is creating in the rest of the world. Times are likely to be hard for foreign leaders who cozied a bit too much with the Trump administration. In some cases – e.g. Boris Johnson – the new pressure may reduce the probability of accidents, in others – e.g. Recep Erdogan – the looming change in the US foreign policy stance may fan the flames on an already volatile situation.