Having stiff-armed political risk for quite a while, market participants now have to think a lot more about the issue in general -- and specifically, about how much the Trump administration’s legislative agenda will suffer on account of Republicans’ last-minute decision on Friday to pull their health-care bill from an imminent vote on the floor of the House of Representatives.
Some may be inclined to predict other failures that would impact forthcoming economic bills, given the erosion of Republicans’ political capital and the Washington blame game that’s sure to play out. But the situation on the ground is a lot more complicated than that.
The derailment of a legislative effort strongly pushed by the president and House Speaker Paul Ryan raises questions about the credibility and influence of the most important members of the Republican Party. This matters to investors, if only because stock markets have already been materially boosted by the view that Republican control of the White House and both chambers of Congress opened the way for the passage of pro-economic-growth and pro-corporate-earnings legislation. Washington now finds itself in a massive political storm whose possible implications go well beyond health care and political theater.
Because of that, there’s a temptation to extrapolate from the messy health-care debacle that future legislative efforts to reform the tax regime and increase infrastructure spending (and accommodate that in a pro-growth budget framework) face a higher risk of difficulties. It’s a view that highlights the Republican Party’s fractiousness and the inability of the president to force unity on an issue that was central to GOP campaigns in every election since 2010.
That is certainly possible, but it’s far from the only potential outcome -- if only because of the complexity of the health-care issue itself. The process also had its slippages -- from unfortunate sequencing and seemingly partial preparation to messy consultative rounds and what appears to have been an unbalanced stick-and-carrot process.
In assessing implications for economic legislation, an alternative view is that this week’s debacle may end up acting as a catalyst for strengthening party unity in the context of a better-structured two-track approach. It builds on the view that the failure reflected, in Ryan’s words, the “growing pains” of going from an opposition party to a party in power, and those pains would be overcome in other areas where already there is more agreement. Indeed, the president has already stated that he intends to pivot immediately to tax reform, a signal that some Republican lawmakers are amplifying.
In this scenario, the first track -- that of health care -- would now move at a much slower pace, spreading the party’s desired “repeal and reform” effort over several bills. The other track, involving tax reform and infrastructure, would be accelerated while avoiding some of the procedural slippages already experienced by the first track. This second interpretation has the added advantage for markets of lowering the risk of disruptive trade protectionism.
I do not have enough of a feel or detailed-enough analysis right now in order to speak with conviction as to the probabilities of these two possible scenarios. Indeed, there could even be other outcomes. But what should be crystal-clear is that the implications for stock markets are very different depending on which prevails over the next few weeks. As such, market participants need to step up their analysis of political risk factors whose relevance extends well beyond the United States. In the first instance, this should be reflected in an increase in what, until now, has been a prolonged period of notably repressed price volatility.
This column does not necessarily reflect the opinion of the editorial board or Bloomberg LP and its owners.
Mohamed A. El-Erian is a Bloomberg View columnist. He is the chief economic adviser at Allianz SE and chairman of the President’s Global Development Council, and he was chief executive and co-chief investment officer of Pimco. His books include “The Only Game in Town: Central Banks, Instability and Avoiding the Next Collapse.”
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