What will the US presidential election mean for the economy?

Current Economic Inheritance

• Jared Bernstein (Biden Administration CEA Chair) characterizes the macroeconomic landscape as a "solid expansion" featuring:
  • Inflation rates trending close to target levels without significant sacrifice to growth.
  • Unemployment remaining low despite a slight recent uptick.
  • Monthly job gains averaging approximately 186,000 over the past three months, aligning with the "break-even" growth level required to maintain labor market health.
  • Ongoing increases in real wages and household incomes.
• Bernstein identifies specific "unfinished business" and structural risks including:
  • Persistent deficits in the housing and childcare markets.
  • Threats posed by extreme weather events.
  • Ongoing geopolitical and trade challenges.
• Kevin Hassett (Former Trump Administration CEA Chair) describes the economic environment as "befuddling" due to conflicting signals:
  • Early summer indicators suggested a recession, prompting the Federal Reserve's 50-basis point rate cut.
  • Recent data shows a sharp improvement in unemployment, contradicting recessionary models (SOM rule).
  • Recent inflation reports present new challenges for the Federal Reserve following the rate cut.

Trade Policy and Tariffs

• Kevin Hassett advocates for a "Reciprocal Tariff Act" to address global trade asymmetries:
  • Current data indicates foreign countries charge an average of 6.5% on U.S. exports, compared to 3% on U.S. imports.
  • The policy aims to initiate a "game theoretic contest" where trading partners either raise their tariffs to 6.5% or the U.S. raises theirs to match.
  • Hassett supports maximum tariffs up to 50% for specific nations like India, which has a high bound tariff limit.
  • He argues sweeping measures like a universal tariff are complex and may require congressional legislation, whereas targeted tariffs for national security or anti-dumping are within executive authority.
  • Hassett emphasizes tariffs against China to counter intellectual property theft, state-sponsored corporate espionage, and massive overcapacity in strategic sectors like steel.
• Jared Bernstein distinguishes between "targeted" and "sweeping" tariff approaches:
  • Targeted tariffs are viewed as a legitimate tool to protect against specific unfair trade practices, particularly regarding Chinese overcapacity.
  • Sweeping, universal tariffs are criticized for functioning as a "national sales tax" that severely impacts consumers and domestic producers of intermediate goods.
  • Bernstein asserts that while the U.S. benefits from robust trade flows, it will use targeted measures to prevent the "hollowing out" of key American sectors.

Corporate Taxation

• The Biden-Harris administration proposes increasing the corporate tax rate to 28%, representing a net increase in revenue:
  • Administration officials argue that historical research on the positive growth effects of lower rates is economically small compared to the revenue lost.
  • The proposal aims to balance a sustainable fiscal path with the need to facilitate corporate investment and profitability.
• Kevin Hassett opposes the 28% rate hike, characterizing it as the largest increase in the developed world in the last 50 years:
  • He cites the 2017 tax cut (from 35% to 21%) as nearly revenue-neutral due to base broadening and international provisions.
  • Hassett contends that revenue-to-GDP ratios are currently higher than pre-tax-cut levels, validating the "Laffer curve" theory that the U.S. was previously on the wrong side of the curve.
  • He warns that moving from 21% to 28% places the tax rate far on the wrong side of the curve, potentially damaging economic growth.

Taxing Unrealized Capital Gains

• The Biden proposal suggests a prepayment tax on future realizations of unrealized gains, targeting taxpayers with assets exceeding $100 million:
  • Jared Bernstein argues this addresses fairness, as high-net-worth individuals often pay effective tax rates in the single digits despite asset appreciation.
  • The policy targets the practice of using assets as collateral to generate income without current tax liability.
• Kevin Hassett classifies this mechanism as a "wealth tax" and warns of severe economic distortion:
  • He models the tax as having an implicit 100% tax rate on capital income when compared to a 3% risk-free interest rate.
  • Hassett predicts that such implicit taxation would cause economic models to "blow up," resulting in significant stagnation of growth.

Social Safety Net and Tax Credits

• Both economists acknowledge the value of expanding the Child Tax Credit (CTC) and Earned Income Tax Credit (EITC), though they emphasize different outcomes:
  • Jared Bernstein cites the American Rescue Plan expansion, which reduced child poverty from approximately 12–13% to 6%.
  • Bernstein describes these measures as having a high "bang for buck" due to the long-term economic contributions of children who receive a better economic start.
  • Kevin Hassett supports the policy as a means of equalizing opportunity for families hardest hit by inflation, noting that low-income families have low consumption elasticity regarding essential goods.
  • Hassett declines to specify an optimal credit size, framing the magnitude as a political rather than purely economic question.

Fiscal Sustainability and Deficit Reduction

• Jared Bernstein identifies a tension between short-term market stability and long-term fiscal health:
  • He notes robust current demand for U.S. Treasuries, indicating no imminent liquidity crisis.
  • However, he argues for a shift to a "more sustainable fiscal path" to avoid a future forcing event, warning that current market stability may lead lawmakers to ignore long-term risks.
• Kevin Hassett anticipates a "big budget showdown" in the next year due to the debt limit reaching a crisis point:
  • He attributes the deficit problem primarily to spending levels being 4% of GDP higher than historic norms rather than a lack of revenue.
  • Hassett predicts potential bipartisan agreement on the need to reduce the deficit, with the primary disagreement centering on whether the solution involves increased taxes or spending cuts.