Who would be better for the US economy?

Something has been missing from the flood of commentary following the debate between US President Joe Biden and Donald Trump.

While voters’ judgments about a candidate’s personality and personal strengths are important, everyone should remember the famous dictum: “It’s the economy, stupid.”

In the firehose of outright lies that Trump spewed throughout the debate, the most dangerous falsehoods concerned his and Biden’s respective economic-policy records. 

Assessing a president’s management of the economy is a tricky business, because many developments will have been set in motion by one’s predecessors.

Barack Obama had to deal with a deep recession because previous administrations had pursued financial deregulation and failed to head off the crisis that erupted in the fall of 2008.

Then, with congressional Republicans tying the Obama administration’s hands and calling for belt tightening, the country was deprived of fiscal policies that might have brought the economy out of the Great Recession faster. By the time the economy was finally on the mend, Obama was on his way out, and Trump was on his way in. 

Trump did not hesitate to claim credit for the growth that ensued. But while he and congressional Republicans slashed taxes for corporations and billionaires, the promised surge of investment never materialised. Instead, there was a wave of stock buybacks, which are on track to exceed $1t next year. 

Although Trump cannot be blamed for Covid-19, he certainly bears responsibility for an inadequate response that left the US with a death toll far above that of other advanced economies. While the virus disproportionately claimed the lives of the elderly, it also cut into the workforce, and those losses contributed to the work shortages and inflation that Biden inherited.  

Biden’s own economic record has been impressive. Immediately after taking office, he secured passage of the American Rescue Plan, which made the country’s recovery from the pandemic stronger than that of any other advanced country. Then came the Bipartisan Infrastructure Law, which provided funding to start repairing crucial elements of the US economy after a half-century of neglect. 

The next year, Biden signed the CHIPS and Science Act of 2022, which launched a new era of industrial policy that will ensure the economy’s future resilience and competitiveness. And with the Inflation Reduction Act of 2022, the US finally joined the international community in fighting climate change and investing in the technologies of the future. 

In addition to providing economic insurance against the possibility of a stubborn and ever-evolving virus, the American Rescue Plan nearly halved the rate of childhood poverty in the space of a year. But it also was blamed for the subsequent inflation. This charge simply does not hold water.

There was no excessive aggregate demand from the American Rescue Plan, at least not of a magnitude that could account for the level of inflation.

Most of the blame lay with pandemic- and war-induced supply-side interruptions and shifts in demand. Insofar as Biden could combat these, he did so: he tapped the Strategic Petroleum Reserve to address oil shortages and worked to relieve bottlenecks at US ports. 

Even more relevant to this election is what lies in the future. Careful economic modelling has shown that Trump’s proposals would cause higher inflation – in spite of lower growth – and greater inequality.  

For starters, Trump would raise tariffs, and the costs would mostly be passed on to US consumers. Trump assumes, contrary to basic economics, that China would simply lower its prices to offset the tariffs. But if it did that, no American jobs would be saved. 

Moreover, Trump would curtail immigration, which would make the labour market tighter and increase the risk of labour shortages. And he would increase the deficit, the effects of which might induce a worried US Federal Reserve to raise interest rates, thereby decreasing investment in housing, raising rents and housing costs even further.

In addition to slowing growth by dampening investment, higher interest rates would also push up the exchange rate, making US exports less competitive. Moreover, US exports would suffer from higher-cost inputs owing to higher tariffs, and the retaliation they would provoke. 

The 2017 corporate tax cuts did not stimulate much investment, and most of the benefits went to the very rich and to foreigners. The additional tax cuts that Trump is promising aren’t likely to do any better, but they will almost certainly increase deficits and inequality.

Of course, there is considerable complexity in modelling these effects. It is unclear how fast or forcefully the Fed would respond to tariff-induced inflation, but its economists obviously would see the problem coming. Would they be tempted to nip it in the bud by hiking interest rates early?

Would Trump then violate institutional norms by trying to fire the Fed chair? How would the markets respond to this new era of uncertainty and chaos? 

Mr Joseph E Stiglitz, Project Syndicate