Economic forks: Trump vs. Harris on the brink of election

Preliminary results of the U.S. presidential elections may be known on the night from Tuesday to Wednesday Greenwich Time.

 Polls are mixed, but the latest ones more often predict a slightly higher chance of winning for the Republican candidate, former President Donald Trump, than for his rival Kamala Harris, the current Vice President. Also, participants in betting markets see a higher probability of Trump’s victory.

The number one topic in this year’s election campaign is the economy, and Donald Trump is more trusted in this area. For example, in a recent public opinion poll conducted by the "New York Times" and Siena College, 52% of respondents felt that he would be a better economic manager than Harris, whereas 45% disagreed.

These opinions are not surprising when considering how American consumer sentiments have evolved in recent years. The sentiment index, calculated by the University of Michigan, stood at 70.5 points in October. Although this is more than the average over the last four years when Democrat Joe Biden has been in office, it is less than any time during his predecessor and potential successor’s tenure.

Even in 2020, the last year of Donald Trump’s term when employment in the U.S. plummeted due to the COVID-19 pandemic and the unemployment rate surged, Americans rated the state of the economy, their finances, and their prospects better than they do today. Meanwhile, Harris, although she announces an income tax cut for most households, is seen as a continuation of Biden’s policy.

A quick glance at the main U.S. economic indicators under Trump and Biden reveals the sources of recent dissatisfaction. The latter served during a period of significantly higher inflation, which hindered household purchasing power growth. From February 2021, the first full month of the outgoing president’s office, to September 2024, consumer prices in the U.S. rose at an average annual rate of 4.4%. In total, during this time, the price level increased by almost 16%. During Trump’s four-year term (from February 2017 to January 2021), inflation averaged 1.5%. The price level rose only by 6.6%.

As a result, the median U.S. household income in 2020 (the last full year of Trump’s presidency) was 8% higher in real terms than in 2015, despite a decline in the pandemic year of 2020. Under Biden’s administration, real income also ultimately grew, but to a much lesser extent. By the end of 2023 (not accounting for the more favourable 2024 in this regard), it was only 1.3% higher than in 2020.

The Democratic staff argues that although it was Biden's administration that had to combat high inflation, the phenomenon itself had little to do with its decisions. The energy shock associated with Russia's attack on Ukraine and the rebound in consumption after the COVID-19 pandemic, coupled with supply chain disruptions, contributed the most to rising prices. This consumption boom, which coincided with a restricted supply of goods, was partly a consequence of the anti-crisis policy of the Trump administration in 2020, particularly cash transfers to households. Biden's administration also attempted to stimulate the economy, but ultimately – as it seems today – this did not prevent the Fed from quelling inflation.

From the perspective of consumers (and voters), the causes of inflation are secondary. The fact is that under Trump, their incomes grew faster than under Biden, despite a clear improvement in the U.S. labour market during the latter’s tenure. In recent months, employment growth in the U.S. has slowed, yet the number of non-farm jobs in October 2024 was 16 million greater than in January 2021 (these are seasonally adjusted data, meaning they are comparable across different months). Under Trump's administration, employment decreased by nearly 3 million people.

This comparison is somewhat unfair, as Trump’s presidency was marred by the drop in employment during the pandemic’s economic paralysis in 2020, while Biden is credited with the rebound in employment in 2021. But even if these disruptions are ignored, the Democratic president's tenure was more successful in this regard than the Republican’s. From the beginning of Trump’s presidency to the end of 2019, the number of non-farm workers increased by almost 6 million. Currently, it is over 7 million more than at the end of 2019.

Paradoxically, if American voters choose Trump instead of Harris, primarily remembering the high inflation under Biden, they could be jumping from the frying pan into the fire. Economists generally agree that a return of the Republican candidate to the White House would further spike inflation. This would then limit consumer demand and lead to more restrictive monetary policy, hindering economic growth. In the extreme scenario, the U.S. could face stagflation.

There are few precise forecasts, as the extent to which the future president will be able to implement their promises also depends on the balance of power in Congress. Elections to both houses of Congress (for the Senate, this concerns one-third of the seats) are held simultaneously with the presidential elections. Therefore, economists typically provide variant forecasts: how much they would alter their baseline scenario depending on which parts of the programmes would be implemented and to what extent. The clarity of such forecasts is hindered by the fact that basic scenarios already rely on some assumptions about the economic policy of the next administration.

For example, economists from Rabobank assume that after the elections, Congress will remain divided as it is today, i.e., one chamber will be dominated by Republicans and the other by Democrats. Such a state limits the president's room for manoeuvre on fiscal matters, leaving some freedom, for example, in trade policy. Under these assumptions, the latter has a crucial impact on forecasts depending on who will sit in the White House.

Rabobank economists predict that if Trump wins, U.S. inflation in the next two years (2025/26) would average 3.6%, and if Harris wins, 2.6%. This would influence the Federal Reserve’s stance.

In the first scenario, the Fed's main rate at the end of 2026 would be 4.25%, compared to 5% currently, and in the second scenario, 3.5%. This would, in turn, impact the pace of economic growth in the U.S. Under Trump, U.S. GDP would increase by 1.7% in 2025, 1.2% in the following year, and 1.9% in 2027. Under Harris, growth would be 1.9%, 1.9%, and 2.1%. It would, therefore, be 0.4 percentage points higher on average, although still relatively low by historical standards. As analysts from the Dutch bank explain, this is a consequence of the Democratic candidate’s promise to raise taxes on companies, which would stifle investment growth.

However, the authors of this forecast emphasised that they assumed a lower increase in import tariffs than Trump announced. The minimal universal rate (i.e., affecting all trading partners and goods) would rise to 5% instead of 10-20%. The U.S. doesn’t apply such a rate at all today, but the average import duty rate is 3%. However, if the minimum duty were to be 10%, economists from Rabobank estimate that inflation in 2026 would average 5.4% instead of 4%. This shows how significant the details of trade policy are.

In addition to introducing a minimum tariff rate, Trump promises a radical increase in tariffs on goods imported from China. They should be at least 60%, but in some cases up to 100% - as is currently the case for electric vehicles. Kamala Harris’s team, which only announces selective increases in tariffs on Chinese goods, claims that her opponent’s proposals would effectively amount to taxing American consumers. Economists’ estimates seem to confirm this. For example, analysts from Capital Economics believe that all of Trump's trade policy ideas would push up inflation by 2 percentage points almost overnight.

But trade policy is not the only reason why under Trump, in the eyes of economists, inflation would increase. The decisive reduction in the inflow of immigrants, also pledged by the Republicans, and changes in fiscal policy would also contribute to inflation. Although Trump formally expresses concern over the state of U.S. public finances, his tax and spending proposals would likely lead to a significant increase in the deficit and national debt. Fiscal policy announced by Harris would also be expansive, but to a lesser extent.

Thus, according to the Committee for a Responsible Federal Budget, implementing Trump's promises, including maintaining the temporary individual income tax cut from 2017 and reducing the tax on domestic corporate income from 21% to 15%, in the extreme case would increase the U.S. public debt to $15.5 trillion by 2035 from about $36 trillion currently. This would mean raising the debt to about 160% of GDP from just under 100% of GDP now.

For comparison, simulations by the Congressional Budget Office suggest that maintaining the current legal status would increase the debt over this horizon to 125% of GDP (this refers to net debt, excluding those parts of U.S. government debt held by public entities; considering such liabilities, the U.S. public debt already exceeds 120% of GDP).

In the most probable scenario, i.e., taking into account political and market barriers to such a debt increase, U.S. government liabilities would increase by 2035 to 143% of GDP.

Kamala Harris announces increasing corporate profits tax to 28% and also raising levies on affluent individuals. Simultaneously, she wants to maintain or even expand the household tax cuts for those earning up to $400,000 annually, which Trump introduced. As economists from Goldman Sachs predict, her programme would also lead to slightly faster employment growth than the programme implemented by Trump. This, in turn, would increase the tax base.

On the other hand, an increase in import tariffs would not compensate for the budget revenue shortfall. Nonetheless, in the extreme scenario, the current U.S. Vice President's ideas would cause the U.S. public debt to rise to 144% of GDP and, in the most probable scenario, to 134% of GDP.

In summary, according to predominant economist forecasts, Trump's broad economic policy would have a more negative impact on the economy than Harris's policy, and it would also be more costly.

Grzegorz Siemionczyk, chief analyst for money.pl