United States: Assessing Clinton and Trump's economic policies
August 26, 2016
As the dust settles following the presidential conventions, major opinion polls show Hillary Clinton with a sizable lead over Donald Trump. The economic policies of the victorious candidate will have implications within the borders and for the global economy, affecting trade, fiscal policy and overall growth. While Clinton represents the status quo, Trump could lead the country into broadly unchartered waters. The current opinion poll results are in line with previous elections, whereby a tight race in the polls over the late spring and early summer usually becomes more one-sided in August. Although analysts and political scientists agree that although the current polling looks favorable to Clinton, the presidential election will be decided in some fiercely contested states where outcomes cannot be predicted with certainty. One factor to highlight however is that in nearly every election since 1952, the candidate who had led polling at this stage in the campaign—as Clinton does—has won the popular vote and the election in November. An exception to this was in the 2000 presidential election, when the candidate who was winning in the polls in August did win the popular vote, but lost the election. Vice President Al Gore narrowly won the popular vote and yet he lost the Electoral College vote.
Some of Hillary Clinton’s proposals—such as immigration reform, a higher minimum wage and universal healthcare—are in line with the policies of President Barack Obama. They could, nonetheless, still be blocked by the House of Representatives (the lower house of Congress) if the Republicans win the majority. Clinton, however, differs from Obama in one key area: foreign trade. The former Secretary of State has stated that she would not ratify the Trans-Pacific Partnership (TPP) negotiated by the Obama administration. But, there are increasing expectations that the U.S. will ratify the TPP in the lame-duck session of Congress.
Clinton’s general economic platform aims to narrow the gap between the rich and the middle classes. She has promised to increase the federal minimum wage from USD 7.25 an hour to USD 12.0 an hour. Such a move would benefit existing and new employees, but it has the potential to discourage some businesses from hiring low-wage workers. She has also pledged to provide workers with up to 12 weeks of paid leave, at not less than two thirds of their current wages, to care for a new child or a seriously ill family member, or to recover from illness. Hillary Clinton has also promised to improve declining infrastructure in the U.S., spending USD 275 billion over a five-year term. In order to pay for this, the Democratic candidate plans to increase taxes on wealthy individuals. She is proposing a new 4% surcharge on incomes above USD 5 million, effectively creating a new top tax bracket of 43.6%—the current top marginal rate is 39.6%. Meanwhile, those earning more than USD 1.0 million would be subject to a minimum income tax of 30% (the “Buffett Rule”). In addition, Clinton plans to reduce exemptions and deductions for the wealthy and increase the state tax. Commenting on the implications of Clinton’s plan for the U.S. fiscal deficit, Tom Kenny, Senior Economist at ANZ said:
“Clinton’s key policy proposals would likely result in a higher federal fiscal deficit as new spending outweighs tax increases. Expansionary fiscal policy should be supportive of growth and higher inflation. On the former, Clinton’s tax hikes should have a minimal impact on consumption, while her spending plans on infrastructure and education should support long-term US growth. Stimulatory fiscal policy should also result in tighter monetary policy and higher long term interest rates.”
In contrast to Hillary Clinton’s economic platform, there is little detail regarding Donald Trump’s proposals and a key caveat is that even if Trump becomes the next President of the United States, it remains highly uncertain whether his policies will be supported by Congress. Trump’s general economic platform is based on three major policy initiatives: tax reform, immigration and foreign trade. Trump has pledged significant changes to the tax code, including sizeable cuts for individuals and corporations. He has pledged to undertake the “biggest tax reform since Reagan”, which implies overhauling the current seven personal income tax brackets that range from 10% to 39.6%, into a three-bracket system of 12%, 25% and 33%, in line with the House Republican Tax reform policy blue print. Regarding corporate taxes, the Republican candidate has reiterated his position to limit the taxation of business income to 15% from the current 35% and also to “penalize” U.S. companies that relocate production or people offshore to take advantage of lower costs abroad. Although Trump has stated that his proposal for tax reform will not increase the fiscal deficit, he has not provided any detail on how to fund this deficit—either by raising revenue elsewhere or by cutting spending.
Regarding immigration, Trump has been severely critical of the current and previous administrations’ immigration policies. In his speeches, he has been clear that he believes foreign workers impact the economy by pushing down U.S. salaries and elevating the unemployment rate. On this matter, the Republican candidate has proposed imposing greater border controls in order to curb the inflow of illegal immigrants, including building a wall along the U.S.-Mexico border. He has promised to act with more intensity to enforce current laws and deport around 11.3 million illegal immigrants. He has also pledged to restrict legal immigration.
Regarding trade policy, Trump and Clinton share the view that the TPP needs to be vetoed or rearranged. But Trump’s general views on trade are more controversial and may have far-reaching implications for global trade. He has been highly critical of the current U.S. trading arrangements, including the TPP, NAFTA and China’s entry into the World Trade Organization. Since the U.S. has significant trade deficits with China and Mexico, Trump’s focus remains on these two trading hubs. The two countries account for USD 800 billion (or nearly 35%) of U.S. total imports, while shipments to these destinations account for USD 350 billion (about 25%) of total exports. Therefore, he has promised to renegotiate NAFTA and to bring China to the negotiating table by declaring it a currency manipulator. His official website claims that the Chinese yuan is undervalued, “by anywhere from 15% to 40%.” In response, Trump has proposed a 45% tariff on all imports coming from China, until the Chinese government allows the currency to float freely.
It is not difficult to conclude that Trump’s immigration and trade policies would significantly diminish the U.S. economy and make it vulnerable, not to mention that they would constitute a clear threat to globalization and free trade. A Trump victory could strain China-U.S. relations, with China potentially implementing tit-for-tat measures in harsh retaliation. Meanwhile, Trump’s tax cuts are likely to be funded through higher fiscal deficits and thus to add to the already-high government debt levels. Could, then, Trump be the next Reagan? Dr. Jörg Kramer, Chief Economist at Commerzbank, considers it very unlikely:
“Some compare Donald Trump to Ronald Reagan, who between 1981 and 1989 brought the USA forward, both economically and in terms of power politics, after a phase of weakness and self-doubt. Reagan was not taken seriously at the start either. He also had his roots outside politics, in the entertainment industry, and he, too, relied mainly on his charisma at public appearances. Both Trump and Reagan initially supported the Democrats and then fought against the establishment within the Republican Party. Therefore Reagan, too, was controversial within his party at first, while simultaneously being regarded with hostility from outside. But Reagan had a firm ideological basis, whereas Trump’s ideas appear inconsistent. And we should not overlook the fact that Reagan was governor of California between 1967 and 1975 so he had direct political experience. Similar to Reagan, Trump intends to contain the size of government, but at the same time he does not want to touch social security, where the explosion in spending threatens stability over the long-term. Whereas Reagan clearly focused on a growth agenda, the trade conflicts threatened by Trump and the planned deportation of 11 million illegal immigrants threaten to cause massive disruptions to the economy. Therefore, a revitalization of the US of the kind seen under Reagan is not to be expected.”
Trump’s rather vague economic policy would require what some analysts have referred to as “a leap of faith” and the repercussions for the U.S. economy, its trading partners and the global economy are widely unknown, while a Clinton presidency would mean general continuity, although her view on the TPP and a proposal to offer free community college, for example, reflect her contentious battle against former presidential hopeful Bernie Sanders. The coming months should shed more light on what each candidate has in store.
Author: Ricardo Aceves, Senior Economist