Harris vs. Trump: Whose Policies Are Better for the Economy?
With a tighter-than-ever presidential race, and less than two weeks to go until Election Day, American University’s economics professors are breaking down the key policies shaping the contest between Kamala Harris and Donald Trump. From taxes and tariffs to inflation and affordable housing, an October 15 panel covered the critical issues likely to influence voters' decisions. Co-sponsored by the Women in Economics club, the event highlighted where the candidates stand and how their policies could reshape the nation.
Kara Reynolds, professor and chair of the Department of Economics, discussed the importance of the event. “One of our most important civic responsibilities is to be an informed voter, and the department wanted to host an event to help students understand the vast differences between the two candidates and how the policies under discussion during this election season would impact students, their families, and their communities.”
Here are just a few of the key policy takeaways.
On Tariffs and Manufacturing
Professor Robert Blecker teaches courses on international economics, macroeconomics, and the political economy. He's a widely published author on US trade policy.
The Candidates on Tariffs: Donald Trump implemented a lot of tariffs during his first term and threatens more during a second term, including a 10 to 20 percent tariff on all imports and as much as a 60 percent tariff on products from China. Harris responded that these tariffs would be like a sales tax on consumers, pushing up prices. There’s some truth to that, but it’s more complicated.
Tariff Realities: Trump claims that foreign countries like China pay for the tariffs, and therefore they're subsidizing us. Well, that's wrong. And no, foreign countries are not going to pay for Social Security, childcare, or anything else. In the first round of the Trump tariffs, a lot of the effects were born by the intermediaries--wholesalers, retailers, distributors, et cetera. These intermediaries absorbed some of the cost of tariffs through lower profit markups. They also avoided the tariffs by shifting their sourcing to countries without tariffs. So, the United States didn't really see a big increase in consumer prices. But new tariffs, especially if they're large and they're applied to all imports like Trump suggests, so that firms couldn't escape them, would be much more likely to push up prices for consumers.
Domestic Industrial Policy: Both candidates say there is a bipartisan consensus to promote US industrial production and increase manufacturing employment. Economic nationalism is the watchword in both parties today. There's no appetite in either party for new free trade agreements. That said, the candidates differ a lot on how they would be likely to promote this industrialization or re-industrialization.
Candidate Positions: We know what Trump tried before, and he suggests the same things now: tariffs, deregulation, and lower corporate tax rates. It didn't do much good in the first term. There was no big increase in manufacturing investment or employment. Harris does not say much specific about industrial policy. Her campaign website has no tab or choice for trade or industrial policies, but she highlights a few related concepts like empowering American workers. Generally, she is likely to pursue more targeted industrial policies, such as subsidies or tax incentives for high technology and green energy, similar to what was done under the Biden administration.
On Corporate Tax Rates
Professor Juan Antonio Montecino is the co-director of the Institute for Macroeconomic and Policy Analysis at AU economics department, and his recent work is focused on tax policy and inequality.
Corporate Tax Rate Realities: The singular domestic legislative achievement of the Trump administration was a huge package of tax reforms including a reduction in the corporate tax rate from about 35 percent to 21 percent—the largest corporate tax cut in history. Lowering the corporate tax was supposed to incentivize private investment. According to this narrative, corporate taxes are primarily a tax on productive investment— equipment, research and development, construction. The reasoning goes that if you remove this tax, it will stimulate investment, lead to higher wages, and spur economic growth. None of these predictions materialized.
Corporate Profits: Two elements contribute to corporate profits. The first is the return on entrepreneurship, risk taking, or real investment. The second element is excess returns, which are problematic. Over the last several decades, the proportion of corporate taxes that reflect these excess profits has risen significantly. Estimates put this somewhere between half- to two-thirds of all corporate profits. Raising the corporate tax rate will address some of these market power distortions, can improve efficiency, be good for growth, wages, and so forth.
Untapping Corporate Taxes: I don't think it's appreciated how untapped a source of revenues corporate taxes are. Raising the corporate tax modestly, (partially undoing Trump tax cuts), would get us about $1.5 trillion in revenues over 10 years, about three times the amount we're projected to spend on child nutrition programs over the next 10 years. It's enough to pay for the bipartisan infrastructure law that was passed in 2021, and it's about three Apollo space programs in 2023 inflation adjusted terms.
Wealth Inequalities: Stock ownership, corporate ownership, is extremely concentrated. It is overwhelmingly the wealthy who benefit from corporate tax cuts. If you increase the corporate tax, it will lower dividend distributions and lower the return on equity. It also pushes stock prices down. These effects contribute to lowering income inequality and lowering wealth inequality. Put differently, the corporate tax is a highly progressive revenue instrument and a largely untapped one with huge revenue potential.
Trump Policy: The broad takeaway is that if Trump is elected, there's no reason to think that he's not going to follow through and lower the corporate tax rate further. He's proposed lowering the tax rate to 15%. This is most likely going to be bad for inequality, and it's going to be bad for economic efficiency and growth.
Harris Policy: Harris has endorsed the Biden administration's proposal to partially undo the Trump corporate tax cuts and raise them to 28 percent. It's hard to know how high the corporate tax rate can go without hurting economic growth. If you consider the implications of market power and how this relates to stock market valuations, the optimal corporate tax rate can be quite high, and, in my opinion, higher than 28 percent.
The Economics of Abortion Access
Professor Kelly Jones is an applied micro economist who studies the intersection of economics with reproductive health and women's empowered empowerment, both in the United States and in sub–Saharan Africa.
Financial Hardship: Seventy-five percent of people seeking abortions are low income, and 50 percent are living below the federal poverty line. Most people seeking abortion are already parents. These are people with financial responsibilities, and most of them are low income. Surveys find that 40 to 70 percent of people who are seeking abortion report that financial hardship is one of the primary reasons that they are seeking an abortion.
Abortion Access: Seventy percent of abortion seekers are paying out of pocket because many insurance plans won’t cover it. At a minimum, it’s $600 to $800 for the procedure. Beyond this, in 15 states right now, a person must travel to access an abortion provider, and in some states like Texas and Louisiana, that's more than seven hours. People need a car and gas, or a bus or plane ticket. While disadvantaged individuals have a higher rate of abortion seeking, they also face greater difficulties in accessing abortion.
Long-Term Economic Well-Being: We have evidence that access to abortion has impacts on women’s longer term economic welfare. In one study, researchers followed individuals who showed up at abortion clinics just before the gestational limit. Some just missed the cutoff, some just made it. The researchers followed these individuals for four years. Those who were denied abortions had worse economic outcomes, such as more reports to credit bureaus of delinquent debt and bankruptcy. This is some strong evidence that at least in the short- to medium-term, being able to access abortion has significant impacts on economic welfare.
The Independence of the Federal Reserve
Professor Evan Kraft served as director of the research department and advisor to the governor during his 15 years at the Croatian National Bank, the central bank of Croatia.
An Independent Fed: Trump has a track record of calling into question the independence of the Federal Reserve. But it’s been a presidential tradition for the last 30 years to leave a wall between the Fed and the White House. If a president tries to use the Federal Reserve to stimulate the economy so he can be reelected, we will have a bigger boom, and afterwards higher inflation and a bigger problem. Economists call this the political business cycle, and the negative experience from this in the past has fueled a movement for central banks to be independent of direct influence from political leaders.
Trump Policies: Many policies that President Trump proposes are inflationary. The first is mass deportations, which would decrease the labor supply. It would be significantly inflationary. The second, lower interest rates to spur an economic boom, could also lead to capital outflows, which are a little harder to model. I see two possible contingencies. In Path One, we get higher inflation. And the President says, “We want to keep the boom, so we'll just keep the interest rates low.” In this scenario, inflation would soar. The US credit rating would probably be downgraded. That's not just something that affects companies; it affects the cost of borrowing for the federal government and how much taxpayers must pay for government borrowing. Path Two is an immediate retreat, meaning higher interest rates that stop that boom in its tracks. In this case, instead of sustained inflation, we get a large and unnecessary recession. However, in general, it seems clear that dramatically lowering interest rates is an inflationary policy, a policy that could call into question the creditworthiness of the United States and the stability of the US economy.
The Issues Not Being Discussed
Professor John Willoughby is a professor of economics. He's currently writing about alternative economic models of socialism.
Agreement: During Vice President Harris's acceptance speech at the Democratic National Convention, one of her biggest applause lines was when she announced her goal of maintaining the United States position as possessing the most lethal military force in the world. Presumably former President Trump agrees. Thus, there are no serious discussions of the dangers and social costs of excessive military spending.
Military Spending and Social Well-Being: The United States spends more on military goods and services than the next 10 countries combined. Cutting military spending, as Bernie Sanders has said, could lead to more social spending. $80 billion is a lot of money. There’s a $8 billion shortfall in FEMA right now, and we're certainly spending more than $8 billion on military goods that are being exported to other countries.
Economic Warfare: The Trump and Biden administrations agree there should be economic measures taken to degrade China's military power through sanctions and bans on certain forms of investment. I argue that these aren't going to work. Trade restrictions have had the effect of displacing Chinese exports rather than reducing them. China just exports to Mexico or Indochina, and then these goods are exported to the United States. Further, in the realm of technological warfare, restrictions on investment in sensitive areas will accelerate Chinese capabilities. China has a robust scientific engineering infrastructure and resources for creating technological breakthroughs that will surprise us. I would argue for a more cooperative approach towards these sorts of technologies.
Global Warming: Clearly the candidates disagree on this issue. We have one candidate who denies the existence of global warming, and we have another candidate who obviously is worried about global warming but has calculated that discussing this is not in her electoral interest.