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In a world of second derivatives, “reduced stimulus” is the same thing as “fiscal drag.” As an example, the GOP senators want to limit the coronavirus boost to unemployment benefits to US$100 per week, from US$600 per week currently. Let’s do the math. There are about 30 million Americans receiving jobless benefits — so the reduction in fiscal assistance would amount to a total cut in aid of US$60 billion per month. That isn’t small.

Eliminating the US$600 supplement could result in large spending cuts. It also says something that it’s the people who got displaced from their jobs during this pandemic who were keeping the economy afloat.

Amid this backdrop, a Democratic sweep could well happen in November. The polls are leaning that way, for what that’s worth. And history also says the odds are very close to a toss-up. The impact on the markets would be negative and the real question is how much.

Biden presumably would not want to rock any boats if the economy is still weak and fragile, but staying the course in Year One doesn’t mean much at all. Donald Trump had to wait more than a year to get his tax cuts through. Along the way, the power of presidential veto allowed for a series of deregulation moves that surely will be reversed if we see a political shift in November. This alone can negatively influence “animal spirits” and hence the price-to-equity multiples even if tax changes are delayed.

But delayed is not cancelled and the future will be higher tax rates on capital and top marginal personal rates. The theme under Democratic rule will be mean reversion in terms of the capital-to-labour ratio and in the Gini coefficient (extreme income — and wealth — disparities). Of course, there is also the strong prospect of breaking up the Big Tech/telecom/consumer discretionary companies that have become oligopolies.