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To steer the course, or capsize the ship?

The macroeconomic policies of the Clinton and Trump campaigns

BY JAMES MACPHERSON, 27/11/2016

hillary_clinton_dnc_july_2016

Presidential candidates often put forward proposals that are as much political statements as firm policy positions. In an election cycle where labour and trade issues are taking centre stage, Clinton and Trump’s fiscal philosophies hold sway in carving the future of the US economy.

In spite of an NBC/Wall Street Journal poll reporting a 51%  jump in President Obama’s approval rating (Hanrahan, 2016) (its highest point since his second inauguration), waves of discontent have captured much of the American population. Reasons for discontent with the government are appreciably complex and while congressional leaders are rarely popular with the public, the legislative branch remains about as unpopular as it was for much of the late Bush presidency and throughout Obama’s tenure (see Figure 1, data collated from (GALLUP, 2016)).

This can be summarised by the relationship between corporate profitability and labour’s share of income. Cheaper foreign labour and lower offshore production costs have boosted US domestic corporate profits to record highs. At the time of writing this article, the market melt-up continues with the S&P500 set to open at new all times high as global equities advance with commodities at previously unseen rates. Yet in a mirror-image decline, the share of income going to the middle class has collapsed, alongside marginal increases in interest rates.

It is with this backdrop that Former Secretary Clinton and Mr. Trump have laid out their various propositions to expand the US economy. With political anger at fever pitch, Mr. Trump’s rallies increasingly resemble a rock concert in mood and tone, fueled by the assertion that corporate inversion and the influx of illegal immigrants are to blame for the economic plight of the middle class.

Such angry rhetoric has touched a nerve, revealed by the 13.3 million popular votes won by the Trump campaign during the Republican Primary elections. Mr. Trump has proposed several radical policies, which would be an orthogonal departure from the current administration’s plan of action. He has suggested a complete overhaul of the tax code by significantly lowering marginal rates and radically reducing taxes paid by individuals and corporations. Specifically, for households, Mr. Trump has proposed taxing capital gains at a 20 % maximal rate, and taxing carried interest as ordinary business income (PolitiPlatform, 2016a). He also insists on eliminating federal estate gift taxes, and the tax on investment of high-income households to help pay for the Affordable Care Act (PolitiPlatform, 2016a). For corporations, Trump also proposes a number of sizable tax reductions including a decrease of corporate from 35 to 15 % (PolitiPlatform, 2016a). The static cost of his proposals (note this is not an exhaustive list) is estimated at $9.5 trillion over the next decade (Zandi, 2016a). These changes, if implemented, would cause tax revenues as a percentage of GDP to fall to their lowest levels on a sustained basis since the 1940s (Nunns, 2015).

In a political climate where traditional government institutions are wildly unpopular, the appeal of personal tax cuts is not altogether surprising. However, a sober analysis of the macroeconomic consequences of Trump’s proposals reveals that what effectively amounts to an enormous tax cut is both unattainable and unsustainable. Besides unspecific promises to ”cut waste and corruption”, Mr. Trump has yet to outline a targeted plan to make up for billions of dollars of projected lost government revenue. In an ironic twist, despite pulling a core-voting base from low-income individuals with no tertiary education, the tax code under Mr. Trump’s plan would be much less progressive than the current one. It is estimated that more than a third of the proposed tax cuts on personal income would go to the top 1% of income earners, with the average taxpayer in this group receiving a reduction in their tax bill of $275,000 (Nunns, 2015). In contrast, taxpayers in the bottom 99% of income earners would receive a meager tax cut of less than $2,500, on average every year (Nunns, 2015). This regressive policy would benefit individuals with considerable capital, while those with more modest incomes would be left short-changed.

On the other side of the aisle, many of Clinton’s proposals – raising taxes on wealthier households and boosting financial aid for job training and education – resemble those of Obama’s campaign and match the budgets he proposed as president. Perhaps unsurprisingly, Clinton’s top three economic advisors (Michael Shapiro, Michael Schmidt and Jacob Leibenluft) are former staffers of the incumbent, Leibenluft having recently served as deputy director of the National Economic Council. While staunchly pragmatic, the economic platform of the Democratic nominee is less than courageous and decidedly unglamorous. Secretary Clinton has proposed to support near-term growth through increased government spending, particularly more infrastructure investment financed by taxation on wealthy households. In dealing with corporations, she has shown a desire to use the tax code as a means of influencing the business behaviour and financial institutions, by taxing high-frequency trading and imposing a ’risk fee’ on the largest financial institutions.

The Clinton campaign has suggested that additional tax revenues would be used to pay for further government spending. Federal infrastructure investment would receive an injection of $300 billion over a five-year period to be spent largely on transportation, housing and educational programs (PolitiPlatform, 2016b).

A shining light of Clinton’s economic plan is a proposal to reform immigration laws. Indeed, no policy she has proposed would provide a more significant boost to the US economy. In the next decade, 10.4 million immigrants are expected to arrive in the U.S., of which 84% will be of working age (Pew, 2015). The Clinton campaign have suggested reforms which, controversially, include path to legalisation for undocumented immigrants living in the country who meet a certain set of criteria. Increased legal immigration and amnesty for undocumented immigrants could provide the basis for the accumulation of human capital and the expansion of the labour force. Welcoming and encouraging manageable immigration is likely a winning strategy. Numerous empirical studies have been published on this issue (Hunt and Gauthier-Loiselle, 2010), with recent government data only reinforcing the overall academic consensus that increased immigration leads to higher economic growth (Boubtane et al., 2016).

To quantify the macroeconomic consequences of both candidates’ proposed policies, the Moody’s Analytics model of the U.S. economy (Zandi, 2015) was simulated incorporating the candidates’ tax and spending, immigration and trade policies. It predicts that, compared to current law, Mr. Trump’s economic proposals would result in a significantly weakened U.S. economy and the country would suffer a recession beginning in 2018 and extending into 2020 (see figure 2, data collated from (Zandi, 2016a)). Mr. Trump’s tax and spending policies would result in the current budget deficit increasing by $1trillion by 2020, on a static basis. In contrast, the same mathematical model of the progression of the economy shows that under a Clinton presidency the U.S. economy would grow somewhat more strongly than under current law. Real GDP is expected to grow by 2.7% per annum, compared with 2.3% were no policy changes affected (see figure 2, data collated from (Zandi, 2016b)). Through immigration reform and continued expansion of the labour force, the Moody’s Analytics model estimates that the economy would create 10.4 million jobs, a 31% increase as compared to employment progression under current law (Zandi, 2016b).

While policy proposals are often overstated, they are a statement of the candidate’s philosophy and priorities. According to the evidence hereby presented, the economic proposals of the Trump campaign are fiscally unsound, offering no credible alternative to a beleaguered middle class.

Though arguably unoriginal, Clinton’s proposed economic policies will likely lead to growth and expansion of the US economy. Any hope of her policies being adopted at face value would be predicated on the level of cooperation from the Senate – an insurmountable political hurdle for the current administration.

With this, liberal economic reform is unlikely and the US is left with two options: a watered-down version of Clinton’s proposals, which represent ‘business as usual’ or tax cut proposals larger even than the Trump brand.

JAMES MACPHERSON

is a 3rd year PhD student in the Randall Division of Cellular and Molecular Biophysics at King’s College London.

References

Boubtane, E., Dumont, J. C. & Rault, C. (2016). Immigration and Economic Growth in the OECD Countries 1986-2006. Oxford Economic Papers-New Series, 68, 340-360.

Gallup. (2016). Congress and The Public [Online].  [Accessed 01. August 2016].

Hanrahan, T. (2016). President Obama’s Approval Rating Back Above 50% [Online]. The Wall Street Journal. Available: Http://Blogs.Wsj.Com/Washwire/2016/05/23/President-Obamas-Approval-Rating-Back-Above-50/ [Accessed 03. August 2016].

Hunt, J. & Gauthier-Loiselle, M. (2010). How Much Does Immigration Boost Innovation? American Economic Journal-Macroeconomics, 2, 31-56.

Nunns, J. B., L.; Rohaly, J. And Rosenberg, J. (2015). An Analysis of Donald Trump’s Tax Plan. In: Rosenberg, J. (Ed.). Urban Institute & Brookings Institution.

Pew. (2015). Modern Immigration Wave [Online]. Washington, Dc: Pew Research Center Hispanic Trends Project. Available: Http://Www.Pewhispanic.Org/2015/09/28/ [Accessed 03. August 2016].

Politiplatform. (2016a). Donald Trump’s Policies [Online].  [Accessed 06. September 2016].

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