By Michael Roberts
There’s just one day to go before the US presidential election vote and in this second part of my posts on the US economy, I shall look at the economic policies of the two main candidates.
In one sense, who wins matters little to big finance and big business. Both candidates are dedicated to the capitalist system and making it work better for the owners of capital. Larry Fink of BlackRock, the world’s largest asset manager, said he is “tired of hearing this is the biggest election in your lifetime”. The reality, says Fink, “is over time it doesn’t matter”.
And it’s true that the underlying endogenous forces of capitalist production, investment and profit are much more powerful than any particular policy adopted and implemented by a government. Nevertheless, pro-capitalist politicians can differ on what is best for capitalism at any one time. And there are some differences between Trump and Harris on what to do over the next four years.
The main planks of what Trump calls “Maganomics” include more aggressive tariffs on imports from around the world, especially from China, and a draconian crackdown on immigration. His campaign rhetoric also pushes for greater political influence over monetary policy and the Fed on interest rate decisions and in the manipulation of the dollar.
Trump claims he will deliver tax cuts
Trump claims that he will “deliver low taxes, low regulations, low energy costs, low interest rates and low inflation, so that everyone can afford groceries, a car and a beautiful home.” His new tax cuts range from income from overtime pay, tips and pension benefits to massive across-the-board cuts for individuals and corporations. This will undoubtedly reduce taxes for the very rich (yet again) but increase it for nearly every body else.
Trump claims that these tax cuts for the very rich and the big corporations will boost investment and growth, based on the discredited ‘trickle-down’ theory ie if incomes and wealth for the rich rise, then they will spend more and so the benefits will ‘trickle down’ to the rest of us.
But the evidence is to the contrary. The last 50 years have seen a dramatic decline in taxes on the rich across the advanced democracies. And several studies show that this has little or no effect on economic growth – and much more effect on increasing inequality. Two economists from Kings College London, using a newly constructed indicator of taxes on the rich to identify all instances of major tax reductions on the rich in 18 Organisation for Economic Co-operation and Development (OECD) countries between 1965 and 2015, find that tax cuts for the rich lead to higher income inequality in both the short- and medium-term, but do not have any significant effect on economic growth or unemployment.
Trump’s last period in office
Per capita gross domestic product and unemployment rates were nearly identical after five years in countries that slashed taxes on the rich and in those that didn’t, the study found. But the analysis discovered one major change: the incomes of the rich grew much faster in countries where tax rates were lowered. Surprise! This may be obvious from our own experience of the last few decades, but empirical analysis confirms our own perceptions.
As for Trump’s last period of office, when he introduced sharp cuts in corporate and personal income tax, Emmanuel Saez and Gabriel Zucman of the University of California at Berkeley found that for the first time in a century, the 400 richest American families has lower effective tax rates than people in the bottom 50% of income earners.
Bond investors and Wall Street are worried that these tax cuts, while very welcome, could only increase the huge government budget deficit and public sector debt – something that is anathema to the financial sector. Trump’s answer is that he will ‘pay for’ the tax cuts by dramatically increasing the tariffs on imports. Trump plans to impose a 10 per cent levy on all US imports and a 60 per cent tax on goods coming from China. Indeed, Trump is talking of imposing tariffs sufficiently high to allow him to end income tax altogether!
But the Penn Wharton Budget Model, a research group, has estimated that Trump’s plans would raise US budget deficits by $5.8tn over the next decade. Even the conservative Tax Foundation think-tank estimated that his new plan to exempt overtime work from federal levies would cost the US a further $227bn in lost revenue over the next decade.
Sharply regressive tax cuts
Again, empirical analysis of these policies indicate significant damage to US economic performance. A recent study suggests that Trump’s policies are “sharply regressive tax policy changes, shifting tax burdens away from the well-off and towards lower-income members of society”. The paper, by Kim Clausing and Mary Lovely, puts the cost of existing levies plus Trump’s tariff plans for his second term at 1.8 per cent of GDP. It warns that this estimate “does not consider further damage from America’s trading partners retaliating and other side effects such as lost competitiveness.” This calculation “implies that the costs from Trump’s proposed new tariffs will be nearly five times those caused by the Trump tariff shocks through late 2019, generating additional costs to consumers from this channel alone of about $500bn per year,” the paper said.
The average hit to a middle-income household would be $1,700 a year. The poorest 50 per cent of households, who tend to spend a bigger proportion of their earnings, will see their disposable income dented by an average of 3.5 per cent.
Trump’s tariff measures would see levies on imports supercharged to levels last seen during the 1930s following the passing of the landmark protectionist Smoot Hawley Tariff Act. Trump claims the trade barriers will not only raise revenues, but lead to the restoration of US manufacturing. When import tariffs are used to protect a burgeoning and fledgling manufacturing sector as they were in the US back in the late 19th and early 20th century, they may have helped. But now in the 21st century, US manufacturing is in relative decline, a trend that won’t be reversed by protectionist policies – that horse has bolted to Asia.
Income generated from tariffs
Instead, the Peterson Institute for International Economics (PIIE) think-tank in Washington calculates that 20 per cent across-the-board tariffs combined with a 60 per cent tariff on China would trigger a rise of up to $2,600 a year in what the average household spends on goods as inflation rose accordingly.
PIIE senior fellows Obstfeld and Kimberly Clausing think that the maximum amount of additional revenue the administration can raise — by applying a 50 per cent tariff on everything — would be $780bn. “If we wanted to completely replace the [revenue raised from] income tax with a tariff, we would need at least a two-thirds tariff. And then you have to remember that people are going to start substituting away from imports and then there’s going to be retaliation and so on,” says Tedeschi of the Yale Budget Lab. “It’s impossible to make the math work. You probably can’t raise [tariffs] high enough.”
The other main plank of Maganomics is to cut back drastically on immigration. Trump has accused immigrants of “poisoning the blood of our country.” Despite this grotesque racism, many Americans are convinced that their living standards and life are being affected by ‘too many immigrants’. According to Gallup, 2024 is the first year in nearly two decades that a majority of the public wants less immigration to the US. In the past year alone, the desire to reduce the amount of immigration has jumped by 10 points for Democrats and 15 points for Republicans.
Long-term costs of sustained mass deportation
Trump actually calls fo the mass deportation of millions of immigrants. A recent report by the American Immigration Council finds that should the government deport a population of roughly 13 million people who as of 2022 lacked permanent legal status and faced the possibility of removal, the cost would be huge, around $305bn.
And this does not take into account the long-term costs of a sustained mass deportation operation or the incalculable additional costs necessary to acquire the institutional capacity to remove over 13 million people in a short period of time. “To put the scale of detaining over 13 million undocumented immigrants into context, the entire U.S. prison and jail population in 2022, comprising every person held in local, county, state, and federal prisons and jails, was 1.9 million people.”
If spread out over years, the cost would average out to $88 billion annually, for a total cost of $968 billion over the course of more than a decade, given the long-term costs of establishing and maintaining detention facilities and temporary camps and immigration courts. Moreover, about 5.1 million US-citizen children live with an undocumented family member. Separating family members would lead to tremendous emotional stress and could also cause economic hardship for many of these mixed-status families who might lose their breadwinners.
But the overall economic damage would also be significant. As I have argued in the previous post, net immigration has helped the US economy to grow at a faster rate than other G7 economies. Losing these workers through mass deportation would reduce US GDP by 4.2 to 6.8 percent. It would also result in significant reduction in tax revenues. Removing immigrant labour would disrupt all sectors, from homes to businesses to basic infrastructure. As industries suffer, hundreds of thousands of US-born workers could lose their jobs.
Trump’s Maganomics claims it aims to help the average US-born American but in reality, of course, his policies would only enrich the very rich like himself at the expense of the rest, and also jeopardise economic growth and hike inflation. He is heavily backed by individual multi-billionaires, like Elon Musk. They own about 4% of US personal wealth, but have contributed one-third of the campaign money raised by Trump, a billionaire himself. The irony is that 74% of Americans asked would support an annual 2% wealth tax on personal assets over $50 million; 65% support raising the corporate income tax rate and 61% support raising top income tax rates – the exact opposite of Trump’s policies.
The Harris economic platform essentially the same as Biden’s
But big business and the mega banks need not worry, because Democrat candidate Kamala Harris has no intention of introducing a wealth tax, or raising corporate taxes or taxes on the top income earners. On the contrary, Biden maintained the tax cuts that Trump introduced in his 2016-2020 term that will last to 2025, and Harris will not change that. Harris’ economic policy agenda is largely in line with Biden’s economic platform, with some tweaks to emphasize causes that are more important to her, like child tax credit. She wants to restore the Child Tax Credit which would give families with newborn children a $6,000 (£4,630) tax cut.
But she firmly opposes a single-payer health insurance scheme that would end the horrendous cost of premiums that Americans must pay to insurance companies. She says she wants to erase billions of dollars in medical debt for Americans. But this debt pile is precisely due to the unaffordable health costs of the US’ highly expensive and low outcomes private health system.
Harris also accedes to the anti-immigration sentiment. She would support a new bill to continue the construction of more border walls with Mexico costing billions, a policy that when Trump proposed it in his previous successful campaign was opposed by the Democrats.
As for the climate, Trump has made it clear that he will relax regulations and allow further fossil fuel exploration and production – after all he and Tesla boss Elon Musk are agreed that global warming is probably not man-made and anyway is not a serious risk to livelihoods and lives – tell that to the hurricane victims in Florida.
Harris is not much better. Whereas she was opposed to the extremely environmentally damaging method of extracting oil and gas by fracking back in 2019, now she backs new fracking leases to ensure ‘energy security’ after the energy-led price explosion following the COVID pandemic. “My position is that we have got to invest in diverse sources of energy so we reduce our reliance on foreign oil,” she said.
Harris will maintain the tariffs and sanctions on Chinese imports and products that Trump and then Biden introduced. You won’t be able to find a thin enough piece of paper to push between Trump and Harris’ policies towards strangling China’s exports and technology advancement, as well as surrounding China with military bases and forces.
Housing and the record level of mortgages
The Democrats’ chances of winning tomorrow have been seriously damaged by the inflation explosion of 2022-23 with average prices up 20%-plus – see part one of this post. Harris has talked of a federal ban on grocery price gouging – something again that seems like closing the door after the horse has bolted.
The other damaging factor for the Democrats has been housing and the record level of mortgage rates. Harris proposes various subsidies for first-time buyers and the usual tax credits to developers to build homes – but no state construction, of course. Don’t expect these measures to end the national housing shortage.
As for public services, with the budget deficit set to rise and public debt reaching well over 100% of GDP, both candidates are saying nothing, but it can only mean fiscal austerity is on its way, big time. Tax revenues are not being increased – on the contrary. ‘Defence’ and arms spending to pay for the wars in Ukraine and the Middle East have reached record highs and will continue to rise. What will have to give is public spending on education, transport and social care etc. This will apply, whoever wins. So in that sense, Larry Fink is right. It does not matter who wins. The winner of all US “elections” is Wall Street.
From the blog of Michael Roberts, originally published, with all hyperlinks and charts, here. This is the second of two articles by Michael Roberts on the election and the US economy, the first is here.
