Economic Policy Comparisons: T2 v H2
— Dr. Scott B. MacDonald, Chief Economist
Vice President Kamala Harris and former President Donald Trump are offering plans that highlight major differences in how they would approach the US economy. Harris provides greater continuity to the Biden administration's pro-union and green-rooted industrial policy geared to onshore US business and reduce dependence on China. While Trump's proposed economic policies also take aim at China and the revival of US industry, he offers a radical economic restructuring that would be heavily dependent on tariffs to compensate for tax cuts and to finance other measures to unshackle economic growth. Both candidates' policies largely overlook the issues of large fiscal deficits and ballooning public sector debt. It is important to stress that these are proposed plans, which will be dependent on other factors, the most important of which is who controls Congress. What you are being offered may not be what you get.
What is Biden Bequeathing His Successor
President Biden is leaving a mixed economic legacy. As economist Peter Morici noted: "Biden leaves an impressive legacy – and a pile of debt." On the positive side, he launched a badly needed new economic direction for the country with the Inflation Reduction Act (IRA) and CHIPS and Science Act, which offered up $400 billion in tax credits, loans and grants intended to spark the development of US cleantech industries (electric vehicles, batteries and solar panels) and a semiconductor supply chain. This industrial policy approach was targeted at reviving US manufacturing, reducing the US dependence on China, bringing supply chains closer to home, tackling climate change and creating greater employment opportunities for minorities, women and unions.
The Biden years saw the economy expand. Real GDP is expected to grow at 2.6% this year, inflation is currently running at 2.5%, and unemployment stands at 4.1% (as of September), historically not a bad number.
But Biden is leaving behind big problems. Although the economy continues to grow and the stock market has moved upwards, many Americans still feel the bite of inflation. Food prices and rent remain a challenge. At the same time, many feel that the benefits of growth have not trickled down, instead being accumulated by a few who are gaining from greedy corporations. President Biden also failed to deal with some of the country's other problems, including the national housing shortage, the declining quality and rising cost of education and the fiscal deficit and national debt.
The Trump years were marked by a steep rise in government debt. However, Biden continued the process: coming to office with $27.7 trillion in public debt, he is leaving it at $35 trillion, roughly equal to 122% of GDP. The fiscal deficit is expected to be around 7% of GDP, reflecting ongoing spending and a lack of fiscal discipline. In the Biden White House, much as in the Trump White House before it, it seems that deficits do not matter.
Another major problem is the status of Biden's industrial policy under IRA and CHIPS and Science Act. According to the Financial Times, 40% of the biggest US manufacturing investments announced in the first year of Biden's flagship industrial and climate policies have been delayed or paused indefinitely. The reasons for this are a combination of deteriorating market conditions, slowing demand, lack of policy certainty (Trump has said he will cancel IRA), and higher-than-expected costs from progressive measures, such as childcare and a preference for union labor. Enel has put its $1 billion solar panel factory on hold in Oklahoma; LG Energy Solution's $2.2 billion battery storage facility in Arizona is on pause; and Denmark's Orsted ended its New Jersey offshore wind power project, taking a $4 billion loss.
With this economic landscape in mind, Harris and Trump have served up their economic policies.
The Harris Economic World
The Harris economic plan is a continuation of many of the elements that marked the Biden administration. She favors the redistribution of national income (to address income gaps), greater control over the means of production, higher taxes on the wealthy, trade protectionism and paints the big banks, mortgage lenders and other large corporations as the villains on the American economic stage. Building the middle class will be a "defining goal" of her presidency. Although she recently proclaimed herself as a "capitalist", Harris' approach is more interventionist and statist, which some believe smacks of progressive socialism.
Some of the key elements of the Harris economic policy include:
• Raising taxes on corporations from their current 21% to 28% will help pay for an ambitious menu of giveaways.
• Imposing a 25% levy on the unrealized gains from assets such as stocks, bonds or privately held companies for taxpayers with net wealth above $100 million.
• Providing a $25,000 subsidy for first-time home buyers. Analysts believe that the US has a shortage of about 4 to 7 million homes. The Economist noted: "With demand for homes still outstripping supply, extra cash of this kind may just translate into higher prices."
• Creating a $40 billion innovation fund to help state and local governments develop solutions to support the construction of affordable housing.
• Going after price gougers with price controls. According to an Axios survey, 72% of Americans like this idea.
• Raising the minimum wage, eliminating taxes on tips and creating a newborn tax credit of up to $6,000 per year. Axios reports 79% of Americans like the idea of eliminating taxes on tips to service workers, though it reduces tax revenues.
• Canceling medical debt through federal initiatives and partnerships with states (not clear who eats the costs).
• Calling for a $50,000 tax deduction for new small business (up from an initial $5,000).
• She has been short on details on trade policy but has been critical of past trade deals (she voted against NAFTA and the Trans-Pacific Partnership) and would most likely pursue trade measures that address environmental issues and are "worker-centric".
• Leaving in place the tariffs on China, which were originally implemented by Trump.
• Continuing the Biden administration's aggressive antitrust stance, which challenged alleged monopolies in the aviation, energy and technology sectors. The Federal Trade Commission has been the spear tip of this policy; Trump is considering abolishing it.
• Continuing Biden's anti-fossil fuel energy policies. Although Harris has backtracked on fracking, her track record indicates that she will keep IRA and perhaps deepen it. As Attorney General of California, Harris won major settlements against Chevron and BP, as a senator she backed the New Green Deal, and during her ill-fated presidential campaign in 2019, she outlined an energy and climate change platform that supported the ban of fracking on federal lands and opposed all new fossil fuel infrastructure projects.
Maganomics
Trump's "Maganomics" is a mix of traditional Republican mantras for low taxes, reduced regulation, low energy costs (aided by a pro-fossil fuel government), low inflation and smaller and more efficient government. A major departure from the traditional Republican policy platform is a heavy dose of protectionism. If implemented, Trump's economic agenda would radically restructure the US economy, returning it to the 19th century, when a substantial portion of tax revenue came from tariffs on trade rather than from taxes on people's incomes and business profits. In many regards, the raft of tariffs being proposed hasn't been seen in the US since the 1930s with the Smoot Hawley Tariff which set off a global round of retaliatory tariffs. According to Trump, "Tariffs are the greatest thing ever invented."
The main points of Trumps' economic policy are:
• Impose a 20% tariff across for all trade partners.
• Trump regards competition between the US and China as critical. In this he has called for everything from a 60% or higher tariff wall toward China.
• Impose a 100% tariff on countries that are reducing their reliance on the US dollar and seeking to use their own currencies. Among those countries that would be open to such tariffs are Brazil, India, and China.
• Extend the 2017 tax cut or make it permanent. While 50% of Americans like this according to an Axios survey, it would also leave a gaping hole in fiscal financing.
• Eliminate the tax on tips for service workers.
• Discontinue IRA, which would cancel billions of green energy programs and save money. Trump has vowed to "end the electric vehicle mandate."
• The US should embrace cryptocurrencies and create a national bitcoin stockpile. The Trump agenda warns against government surveillance of crypto transactions and opposes the creation of a central bank digital currency.
• Although Trump is generally pro-business, he does not like Silicon Valley companies, arguing that major tech companies like Google and Meta have an anti-conservative bias. He could launch another Justice Department review of large technology companies as he did in 2019.
• Trump, like Harris, favors the creation of a Sovereign Wealth Fund, like what Norway and other countries have.
• Trump is supportive of AI and favors deregulation (as opposed to Harris). He has also pledged that there will be enough energy to meet AI's voracious appetite.
• Trumps wants to repeal the Affordable Care Act and replace it with "concepts of a plan".
• Trump favors mass deportation of illegal immigrants. The Trump argument is that most of these people are getting free money and jobs; their departure would eliminate government costs.
Sifting Through Concepts of Plans
The Harris and Trump economic plans differ on most fronts, but they converge in three areas – as they stand, both are likely to induce greater inflation; will require greater US government borrowing; and are meant to appeal to the working class and make both candidates champions of domestic manufacturing. Trump's proposals are more radical in that he is calling for a massive restructuring of the economy and the country's relationships with the rest of the world. Raising tariffs on all goods coming into the US is likely to result in trade wars, complicate relations with key allies and pass costs on to the US consumers and feed inflation. According to the Peterson Institute for International Economics think-tank, 20% tariffs across-the-board combined with a 60% tariff on China would result in a rise of up to $2,600 per year in what the average household spends on goods.
Harris offers more continuity in economic policy from the Biden administration, though with a larger state hand in people's economic affairs. Her proposal to go after gougers may be popular now, but price controls notoriously do not work. The track record has been inflationary and stimulated the development of black markets for goods, especially as companies have the option to make a set amount of a product and sit back and let shortages emerge. Furthermore, the only way that the new round of state largesse can be financed is to borrow more money, which runs the risk at some point of crowding out companies and financial institutions from the life-giving capital markets.
Harris and Trump offer a debt-fueled future, that after an initial sugar rush of growth may cool, leaving Americans with higher inflation and slower economic growth. But gloom and doom scenarios may be overcooked. The US economy has demonstrated considerable resilience; despite ongoing calls that recession is just around the corner.
