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The Markets Are Wrong to Shrug Off the Capitol Invasion

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Pro-Trump protesters storm the Capitol Building, January 6.
Pro-Trump protesters storm the Capitol Building, January 6, 2021Credit: Stringer ./REUTERS

For most people, the images of Trump supporters running amok through the corridors of the Capitol building last week evoked the words “banana republic.” Those familiar with The Economist’s Democracy Index might have been thinking “flawed democracy.”

But the financial markets, looking at exactly the same images, were evidently thinking “safe haven.” The dollar held steady that day against a basket of currencies, and the next day rose to its highest point since March 2018. Wall Street closed at a record high. Yields on U.S. treasuries, the ultimate safe-haven investment, rose on Wednesday but that was in reaction to the Democratic win in the Georgia runoffs. The Capitol invasion barely registered on the markets.

“There’s a lot of ways in which the institutional environment for Treasuries and the dollar can change over the next few decades. But what happened in D.C. doesn’t rise to that threshold,” Ed Al-Hussainy, a senior analyst at Columbia Threadneedle, told the financial-news website Marketwatch last week.

It doesn't? It’s premature in the extreme to say the attack marked a turning point in U.S. democracy. The Capitol has been the target of violent attacks several times over the years. True, it’s the first time that the president was the one egging on the attackers, but that president is thankfully serving his final days in office.

The whole affair could be dismissed – as the markets seem to have done –  as the death rattle of the Trump era, a dramatic end to a troubled four years, but an end nevertheless. The real pivotal event of the week was the Democrats’ winning control of the Senate, paving the way for a bigger COVID stimulus package. But there’s a good case to be made that the attack wasn’t the end of an era but a ratcheting up of one.

Even if Trump goes away

Trump’s enemies have the unfortunate habit of blaming him personally for everything that has gone wrong in America since he took office, whether it’s the rise in racism, the casual dismissal of scientific facts, the disregard of political norms, and widening socioeconomic fissures.

Trump embodied all of these ills and played a very big role in exacerbating them. But he didn’t create any of them single-handedly. The distressing fact is that even in the midst of a deadly pandemic and Trump’s mismanagement of it, he still captured 47% of the popular vote. The Republican Party, which has backed his most outrageous behavior and is now in the hands of a pack of ugly mini-Trumps, actually made gains in the House, nearly kept control of the Senate and still controls a majority of states.

The ills of the Trump years are here to stay, even if Trump himself retires quietly to Mar-a-Lago. There are still a lot of angry Americans, politicians ready to capitalize on their anger and (whatever big-tech does to crack down on it) plenty of social media to fan the flames.

This half of America doesn't want a return to political norms; it wants blood, although at this point only figuratively.

There was a time when the Democrats and the Republicans were two sides of an establishment coin. The Democrats tacked to the left, favoring welfare-state economics and legal protections for minorities and others; the Republicans tacked to the right, concerned mainly with pro-business policies of low taxes and less government.

Today, it’s a standard part of every Republican stump speech to attach the words “radical left” to any and all Democrats. But the truth is that it’s the Republicans who have gone radical, or more precisely loony. Just look at its economic agenda, which was once the party’s bread and butter.

Exhibit A: The party no longer stands for fiscal prudence, but perpetually lower taxes, preferably for the rich. The 2017 tax cuts were neither necessary, since the economic growth was strong at the time, nor did they produce the investment boom Trump and the party promised.

But they did leave the U.S. with needlessly growing deficits and debt, about which the Republican expressed complete indifference – that is until the economy was knocked for a loop by the coronavirus. Now, as unemployment soared, the GOP got worried about increasing spending too much to counter it.

Exhibit B: The party has always been hostile to environmental regulations because of their cost to business. But by hitching itself so firmly to climate-change denial, its hostility to green legislation has become a matter of principled falsehood. Cost-benefit analysis has given way to an extremist politics that can’t bear the idea that a single lump of coal should ever be left in the ground in favor of a solar panel. That attitude has played no small role in the U.S.’s ceding clean-tech leadership to China.

Those are just two examples of how the Republicans with or without Trump are no longer the party of business in any practical sense of the word.

That job is now left to the Democrats, but their ability to pursue pragmatic policies is severely constrained by their own left wing and by a Republican Party that is in equal parts powerful and nutty.

It’s for that reason that the markets shouldn’t dismiss what happened last week as a one-off event. When it came to economic policy there had been two responsible adults in Washington, but unless the GOP does some growing up very fast, the city is down to barely one, and that’s not enough.

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