By John Manning – firstname.lastname@example.org
The November elections are soon approaching for Americans, and it now looks increasingly like a two-horse race for the US presidency. Both Hillary Clinton and Donald Trump have emerged as clear contenders in the last few weeks, leaving their rivals by the wayside. With Ted Cruz and John Kasich having both suspended their campaigns, Donald Trump has essentially become the de facto nominee for the Republican Party, while Clinton is putting more distance between her and Democrat rival Bernie Sanders in terms of crucial support from pledged delegates and superdelegates.
On the assumption that both Trump and Clinton do end up vying for the coveted spot, there will be significant analyses surrounding the economic impact of a government formed under either candidate, both on a domestic and a global level. Both individuals have posited some distinctly contrasting proposals that are likely to have profound economic implications. Trump believes the US economy is heading for recession but has been more optimistic about turning things around as his campaign has progressed, stating recently that “I can fix it pretty quickly”. Clinton, meanwhile, has sought to assure voters that the current path of stable economic growth will continue long-term under her leadership.
Given that US monetary policy is independently conducted by the Federal Reserve, and therefore subjected to little political influence, all eyes are on the tax and spending policies of the two candidates. Arguably the most distinctive proposals advanced by Trump to date have been tax-related. The business magnate has stated that he plans to implement a four-fold increase in the standard income-tax deduction—from $6,300 to $25,000 for individuals, and from $12,600 to $50,000 for couples, which means that a zero tax rate will be charged for those earning under these new $25,000 and $50,000 thresholds. The number of Americans set to benefit from the zero rate, therefore, equates to a whopping 75 million.
At the other end of the scale, the highest marginal tax bracket would be set at 25 percent for earners bringing in over $150,000 for single people and over $300,000 for married couples; while the middle two brackets would be set at 10 and 25 percent. Indeed, the independent, non-partisan Tax Policy Center has calculated that middle-income households would save an average of $2,700 in tax payments; the top 5 percent of income earners would benefit by $28,000 in tax savings; the top 1 percent would save a staggering $275,000; and the super-rich would get an annual tax cut of $1.3 million, which is equivalent to more than 18 percent of their income on average. As such, a massive increase in disposable income is on the horizon across the board should Trump pip Clinton in November, with the wealthiest groups being the biggest beneficiaries.
While Trump has admittedly made no secret of being particularly favourable towards the rich, the implications for growing inequality in the US, as well as accelerating inflation, are significant. Even more pertinent than such issues, however, is the hole in the budget deficit that such aggressive tax cuts are likely to incur. Indeed, it is not only income tax that Trump plans to slash—corporate tax will be reduced from 35 percent, which is the highest in the OECD (Organisation for Economic Co-operation and Development), to a far more competitive 15 percent. The Tax Foundation—one of the US’s leading independent tax-policy research organisations—has forecast a massive decline of $11.98 trillion on a static basis in the decade following Trump’s tax policies going into effect. Given that the US is already facing a public debt of more than $19 trillion, a Trump presidency is almost certain to swell this metric to unprecedented levels should his proposals be implemented.
Trump has spoken about his intentions to continue balancing the budget, claiming that he can eliminate the debt in eight years, although this would require him to come up with more than $2.4 trillion every year through spending cuts. This is highly unlikely, and even more so given his stated promises not to make any changes to Social Security and Medicaid payments. Nevertheless, should government spending be reduced, it will certainly help to alleviate a widening budget deficit, over which many economists are now showing concern. At the very least, it will provide wholesale tax relief, as well as stimulate economic expansion, although Trump’s resultant GDP (gross domestic product) growth estimates of 5 percent-plus are largely considered as overly ambitious.
Compared to Trump’s tax plans that are disproportionately benefiting the upper echelon of income earners, Hillary Clinton’s fiscal policy is ostensibly geared towards the middle class. Both candidates are now expressing an interest in closing the so-called “carried interest loophole”, whereby money managers and hedge funds would have to treat fees generated from clients’ investments as ordinary income, which is taxed at 39.6 percent, rather than the present situation in which it is treated as capital gains and thus taxed at only a maximum 23.8 percent. Several analysts have previously stated that this lower tax rate is easily the primary contributor to growing income inequality in the US. At present, almost 70 percent of the gain from this current lower tax rate is accrued by the top 1 percent of income earners, while only 7 percent of the return goes to the bottom 80 percent. This particular proposal has been advocated particularly fiercely by Clinton, while Trump appears to have reversed his position more recently, having once been supportive of lowering the capital gains rate. Some believe that such a marked increase in investment taxes will stymie economic growth by pushing investment away from US markets. Clinton supporter Warren Buffett, however, has effectively supported the move on the basis that raising taxes on the wealthy will do little to stop them from investing. Indeed, Buffett has been particularly supportive of a Clinton-led government taking a bigger chunk from the rich across several policies.
The focus on income inequality is a cornerstone of Clinton’s economic focus. In January, she announced that she would introduce a 4-percent “surcharge” on Americans making more than $5 million annually, which is expected to generate $150 billion over 10 years. While it won’t alleviate the national debt, it does provide a step in the right direction to reduce income inequality. She has also promised to “go beyond” Buffett’s additional recommendation of setting the minimum effective tax rate at 30 percent for earnings in excess of $1 million per annum. While Trump’s tax plan will see a notable increase in disposable income for earners in all brackets—and an overwhelmingly larger increase for the wealthy—Clinton’s purported measures are expected to lead to a marginal dip in after-tax income for most income groups. According to the Tax Foundation’s detailed analysis of Clinton’s tax policies, the top 10 percent of taxpayers would see a 1.7-percent drop in income, the top 1 percent would see a 2.7-percent drop, and Americans overall would see take-home pay decline by 0.9 percent. All such reductions will occur while GDP falls by around 1 percent over the long-term, thanks to higher marginal tax rates on capital and labour income. As a result, tax revenues would go up by $498 billion over the next decade on a static basis, but when the 1-percent dip in economic output is accounted for, only $191 billion will ultimately be collected over the period.
Trump has also clearly indicated that the international trade policy of the US will be dramatically altered, with his justification being that current trade deals have been agreed upon at the expense of American jobs. On this point, much of the evidence supports his views. According to a study by the National Bureau of Economic Research entitled “Import Competition and the Great US Employment Sag of the 2000s”, US net job losses amounted to between 2 and 2.4 million as a direct result of increased import competition from China between 1999 and 2011, with Chinese imports being responsible for 10 percent of the 5.8 million US job losses in manufacturing employment during the period.
In response, Trump intends to introduce hefty import tariffs against particular countries, with a 45-percent levy on Chinese exports to the US being the most notable, as well as a 35-percent one on those of neighbour Mexico. China is set to overtake Canada this year as the US’s biggest trading partner, which means that such a tariff could seriously dent the wallets of American citizens. In relation to this issue is Trump’s desire to pursue China for manipulating the yuan, which has resulted in the currency artificially trading lower against the dollar and thus making domestically produced Chinese goods cheaper than their US competitors. Effectively this has acted like a subsidy for China’s exports to the US—but has been a tax on US exports to China. According to the official website, therefore, the Trump plan is to “bring China to the bargaining table by immediately declaring it a currency manipulator”. If enforced correctly, many believe that such a policy could be instrumental in boosting US manufacturing employment.
However, a policy of getting tough with America’s trading partners will send both China and Mexico straight into recession, as per a study by Moody’s. The credit-ratings agency produced analysis in March that assumes that such countries would respond with protectionist tariffs of their own, which in turn would also send the US into a prolonged state of negative economic growth. The Moody’s model has profound implications for the global economy should Trump enforce such protective trade measures. It suggests that prices on imports from China and Mexico will go up, which in turn will diminish the spending power of US consumers. Exports will also decline if China and Mexico implement their own tariffs, triggering considerable layoffs at US export companies. Indeed, 4 million job losses would be the result, while a further 3 million jobs would be prevented from being created—ones that would have otherwise emerged.
The resultant and sizeable constraint on the US’s trade balance and the reduction in consumer spending, Moody’s believes, will induce negative economic growth in the US that is likely to spread to trading partners in Europe, causing global growth to slow further. If retaliatory trade measures are not implemented by China and Mexico, however, Moody’s expects the job-losses figure to be cut in half, while the country would avoid recession, albeit marginally.
Other analyses, however, refute much of the Moody’s model. J.W. Mason, an economist at think tank the Roosevelt Institute, does not accept Moody’s underlying assumption that tariffs would yield little return to the US of the approximate 1 million manufacturing jobs that have been lost to China in the last 15 years, according to estimates. Mason also discounts the idea that China and Mexico would respond to the US with similar tariffs, as this would only hurt their own economies.
Trump also wants to renegotiate international trade agreements involving the US, namely the North American Free Trade Agreement (NAFTA) with Mexico and Canada, which he has called a “disaster”, and the Trans-Pacific Partnership (TPP), which he has described as “an attack on American business”. The incumbent government has forecast that the TPP will boost the global economy by $223 billion, but the Trump team believes such a free-trade deal will hurt US manufacturing companies as Americans will be able to buy cheaper imports from elsewhere. With Japan devaluing its currency last year, moreover, US manufacturing employment will again be cut.
Perhaps somewhat surprisingly, Clinton has been similarly averse to TPP, if not quite as vehemently as Trump. Although she helped in creating the trade agreement under the Obama government, she has since showed increasing concern, stating that she is worried that currency manipulation is not part of the agreement. Indeed, Clinton has taken a significantly more benign approach to international trade than Trump, which is perhaps wise given that should Trump impulsively “tear up” existing trade agreements and/or slap a blanket tariff on a particular company, a trade war is likely to surface. Indeed, sanctions being imposed on the US by the World Trade Organization is not out of the question, albeit highly improbable.
The labour market
If Trump and Clinton seem to share common ground on certain issues, such as TPP and stopping tax-inversion deals—that is, US companies engaging in mergers with overseas entities in a bid to bypass US tax burdens—then they are practically moving in opposite directions when it comes to employment, immigration and wages.
One of Clinton’s key measures—and possibly her most radical—is increasing the minimum wage from $7.25 per hour, which is where it has been since 2009, to at least $12 per hour. She has also been supportive of the Fight for $15 campaign in regions in which it is feasible to do so, and has previously stated she would be happy to sign a bill to set the federal minimum wage at this level. The effect on the economy of this measure is not entirely certain. What is likely, however, is that unemployment and lack of job availability at the lower end of the market will transpire. A substantial $4.75 hike in the minimum wage to $12 per hour—if not a $7.75 hike to $15 per hour—will surely result in businesses being unable to cope with a drastic rise in overall wage costs. In the long run, it may induce businesses to opt for more investment in technology, which could increase the US economy’s productive capacity, and of course will improve the living standards of those who are set to see their wages rise by nearly 50 percent; but in the interim, a significant decline in job postings, coupled with a rise in the number of job seekers, is likely to transpire.
Trump, in contrast, has made a U-turn on the minimum wage issue, at least from a federal point of view. Trump has been happy to “let the states decide” what their respective wage floors should be; but he also stated in November, “Taxes too high, wages too high, we’re not going to be able to compete against the world”, in addition to “Should we increase the minimum wage?…If we’re going to compete with other countries, we can’t do that because the wages would be too high”. Although a few states such as New York, California and Oregon have managed to successfully increase their minimum wages, 21 states have the rate frozen at $7.25, including places with comparatively high costs of living such as Georgia, Virginia, Texas and Wisconsin.
Trump’s stance on immigration has been the most headline-grabbing of all his proposals, specifically his promise to build a wall along the Mexican border and assemble a “deportation force” to deport 11 million “illegal” people from the US. While much of the responsive analysis has dismissed Trump’s desire to implement such measures as absurd, the economic ramifications of deporting even a fraction of this amount, as well as blocking immigrants from entering the country, could be seismic. Research conducted by the American Action Forum (entitled “The Budgetary and Economic Costs of Addressing Unauthorized Immigration: Alternative Strategies”) has concluded that such actions could reduce the labour force by 11 million workers, while also bringing real GDP down by an alarming $1.6 trillion. A number of industries that depend heavily on cheap immigrant labour would be severely hamstrung, agriculture in particular, which would lead to a fall in farming income and a jump in food prices. Moreover, the actual cost of deporting immigrants is likely to be $400 to $600 billion, which is not exactly pocket change.
Clinton’s immigration policy is almost completely antithetical to that of Trump, and while it is not as inflammatory or as concerning to economists, it does represent a fairly major departure from Obama’s policy of deporting recent illegal arrivals. Clinton has pledged that she will “stop the raids, stop the roundups”, and will limit deportations to only “violent criminals, terrorists and anyone who threatens our safety”. She will also build upon President Obama’s 2012 executive action granting amnesty to illegal immigrants who entered the country under age 16 and who are now yet to turn 31. Almost 800,000 of such migrants received work authorisation and Social Security numbers under that program—with Clinton looking to expand the program so that more migrants will end up staying. Whether this ultimately boosts economic growth or adds to the job-seeking unemployed, particularly if a severe minimum wage hike is implemented under a Clinton government, is yet to be ascertained.
Of the two candidates, the policies of Donald Trump are distinctly more aggressive on the whole than those of Hillary Clinton. Perhaps this is understandable from Clinton’s perspective: her party is in government at present and is one that is presiding over an unemployment rate that is now at a low 5 percent; an annual inflation rate that at 1.1 percent is approaching ideal levels; and an economy posting solid 2 percent annual growth rates every quarter. As such, there is little incentive for Clinton to “rock the boat” as she enters the final leg of electioneering. Perhaps this is also why she has decided to advance a number of long-term, growth-boosting measures, but with each measure costing comparatively little and inducing a relatively modest change. For instance, her College Affordability Plan to refinance student debt and pay states to guarantee tuition is only costing $35 billion a year, while her National Infrastructure Plan to improve roads, bridges, railways and online communications is costing $27.5 billion per year.
Just how committed both Trump and Clinton remain to their stated policies should either of them become president is also debatable. Trump’s detractors highlight the fact that he has already altered his stated intentions on a string of proposed measures, or worse still he has completely reversed his positions. As such, one suspects that some of his more outlandish proposals are likely to be moderated come election time. Critics of Clinton, on the other hand, suspect that she is susceptible to succumbing to the interests of Wall Street bankers. Although she has been vocal in her support of financial-regulation measures such as Dodd-Frank and the Volcker Rule, her unwillingness to make available to the public the speeches she made to influential banking audiences have left many wondering whether further banking-system reform will truly be enacted under her leadership. Their proposals will also subsequently have to be passed through Congress, which is a major challenge in itself—enacting actual changes to the tax code, for instance, requires Congressional support that will be difficult to obtain for both candidates, while a tax hike on the rich will be unlikely if the Republicans hold on to at least one of Congress’s two houses. Compromises will have to be made, and deals will have to be struck, but given that the election is still several months away, the domestic and global economic landscapes, and indeed the candidates’ policies, may still change drastically.
Caricature by Peter Fasolino