28 October 2024
The US Presidential election is in nearly here, at last. In recent weeks, we have discussed key topics receiving insufficient attention during the bruising campaign: looming fiscal crises, international trade policy, and climate change. In 1992, James Carville famously reminded us the economy is usually the most important determinant of American election outcomes. And, surveys indicate Donald Trump enjoys an advantage on this issue.
To be sure, the past four years (actually since the Global Financial Crisis in 2008) have been economically challenging. The impact of the Ukraine war, Covid, supply chain disruptions, the cost-of-living crisis, and global geo-political tensions have put households under tremendous pressure. Voters worldwide have vented their frustration; ousting incumbent governments in Germany, the United Kingdom, Italy, France, and elsewhere. Parties of all political persuasions have been dismissed: Germany and the UK have veered to the left, while nationalist parties gained support in Italy and France. Not great news for VP Kamala Harris.
In this blog, I will begin by reviewing the economic performance under recent US Presidents. How do the Biden and Trump periods compare with other previous administrations? Donald Trump is neer shy of using superlatives, but was the Trump economy “the greatest ever”? Former President Trump also suggests America is on the verge of an economic crisis. Is this true (two-thirds of Americans do believe the country’s headed in the wrong direction)? The past is one thing, but elections are about the future. Therefore, I will also offer a framework to assist readers in assessing the contribution either candidate’s economic proposals will make to the nation’s future prosperity.
Economic Nostalgia: Time Heals, Memories Fade
The Chart above compares key macroeconomic indicators during previous Presidential adminstrations. How do the Trump and Biden periods stack up? Rather than being the “best ever”, GDP growth during the Trump era was the weakest in decades. And, the number of people employed actually declined; an experience not replicated in recent history. GDP and job growth have been much better during the Biden administration. And, despite this track record, Mr. Trump’s approval rating is higher now than at any time during his Presidency. Indeed, time heals.
To be fair, however, the Trump results are adversely effected by the impact of the Covid lockdown (of course, the former President must take some responsibility for the economic consequences of his handling of the pandemic). Adjusting for lockdown, the GDP performance under Presidents Biden and Trump is quite similar; both marginally better than the preceeding Obama and Bush 2 terms. However, both lag far behind the Clinton and Reagan years.
Rightly, Biden/Harris are criticised for their inflation track record. After decades of low inflation (including the Trump period), price increases on average nearly tripled during the past 4 years. Quite remarkably, however, the Biden team has failed to put America’s performance intona broader international context. Indeed, all developed countries experienced surging prices as a result of Covid-era monetary stimulus, supply chain problems, and the impact of the Ukraine war on food and energy prices. Eurozone inflation, for example, peaked at a higher level than in America (10.6% versus 9.1%). Both experienced 40%-plus increases in energy quotes. However, European food inflation peaked at 16% (compared to 11% in the USA), reflecting it’s greater reliance on Ukrainian products.
Critics have focused on the role of President Biden’s Covid-era government spending. Undoubtedly, his stimulative budget programs contributed to US inflation. Indeed, European inflation is now declining faster, as Covid fiscal policy was less expansive than in the USA. And, the legacy of bloated government deficits will pose a challenge for the next President. However, the Chart above indicates the Trump administration was not an example of fiscal conservatism. Indeed, out-sized budget deficits led to a larger increase in government debt during his tenure than under any of his predecessors except Barack Obama (impact of the GFC).
On the other hand, is the US economy on the brink of collapse, as Donald Trump suggests? To the contrary, the US economy has outperformed its competitors following Covid under President Biden (Chart above). Indeed, I’m never certain what problem the MAGA movement is aiming to remedy, as American GDP growth has outpaced it rivals for decades (next Chart).
US inflation is now declining sharply, and will soon achieve the Federal Reserve’s 2% target (next Chart). Nevertheless, despite solid economic growth, low unemployment, and rising real incomes, the “feel good factor” is still missing. VP Harris’ dilemma is that despite lower inflation, prices are still rising, and are 20% higher than 4 years ago. Also, workers have not forgotten inflation-adjusted wages declined for 2 years.
Opportunity Versus Innovation Economy
VP Harris’ economic strategy aims to create an “Opportunity Economy”. While details of what this exactly entails remain scarce, critics suggest it may focus on wealth and income distribution issues. Of course, this would not be unwarranted, as both have become increasingly skewed in recent decades (next Chart). On the ther hand, the centrepiece of Donald Trump’s nationalistic, isolationist “America First” strategy is to “protect” American manufacturing jobs through widespread imposition of higher import tariffs.
As an alternative to these two visions, I believe America’s future prosperity requires an “Innovation Economy”. In simple terms, economists believe long-term economic growth and rising living standards stem from the combination of robust productivity improvements, strong business investment, and steady labour force growth. How likely are the Harris and Trump plans to boost American prosperity, sustain the nation’s past outperformance, and meet future competitive challenges?
Productivity: Building Block of Prosperity
High levels of productivity are the essential driver of national prosperity. Indeed, America’s high standard of living reflects its impressive efficiency performance (Chart above). America’s dilemma, however, is that productivity improvements have slowed significantly in recent decades (next Chart). First, US efficiency gains decelerated following the 1970s oil shocks. However, American productivity snapped back with the discovery of the internet and the information technolgy revolution. More recently, however, US output per hour has slowed again after the Global Financial Crisis. Resolving this problem is especially important in light of the demographic challenges America faces in coming decades (more on this later).
Of course, productivity growth has slowed sharply in most countries in recent years. Technological innovation, especially AI, automation, robotics, etc., may well provide the remedy. And, the United States is at the forefront of many of these technologies. However, neither the Trump nor Harris economic proposals address this critical issue. However, Mr. Trump’s plan to impose widespread import tariffs will reduce competition, and stifle innovation and labour productivity; eventually leading to higher inflation (price hikes of up to 4% to 8%) and slower long-term GDP growth (see my blog “Election 2024: International Trade“).
Capital Spending: Crowded Out?
American capital spending (as a percent of GDP) has slipped in recent decades; leaving US business investment well below the world-wide average, espcially relative to Asian competitors (Chart above). Arguably, Mr. Trump has the edge on improving the US business and regulatory environment — a precondition for capex.
However, swollen US budget deficits may continue to crowd out private investment. In an earlier blog (“Election 2024: What They’re Not Telling Us”), I suggested while neither candidate has even considered reducing the government shortfall, Mr. Trump’s plan is more likely to increase US government debt. The United States will require large-scale public funding for infrasturcture and climate investments (Chart above). The Biden/Harris Inflation Reduction Act is an important step in the right direction. In addition to higher income/wealth taxes on high earners, VP Harris is likely to rely on higher corporate taxation. This should not be a huge investment impediment, as America’s corporate tax burden is low (next Chart).
Immigration: Demographics and Labour Supply
A steady increase in labour supply is another critical ingredient in a nation’s long-term economic growth potential. However, the United States and other advanced nations (and many developing economies also) have experienced a dramatic decline in fertility in recent decades. Births per American woman is now 1.7 — below the 2.1 replacement rate associated with a stable population level (Chart below). American demographics are still better than in Europe, where labour shortages are already a headwind to economic growth.
Immigration is a potential remedy. And, while migration is a hot-button political issue both in the USA and elsewhere, it’s worth dispelling the notion the United States is particularly overrun by foreign workers. Indeed, foreign-born residents account for a smaller share of the US population than in many European countries (next Chart).
To be sure, the scale of recent immigration into the USA is unsustainable. In part, the surge is reflects a dysfunctional immigration system. Again, however, America is not alone. For instance, net migration into the United Kingom last year was equal to over 1% of the nation’s population, roughly the same proportion entering the USA annually in recent years. Clearly, the world’s population is on the move. And, part of the response shoud be to understand why this is happening.
Ideally, building a consenus around an immigration strategy should reflect the values of an immigrant nation, and celebrate the contribution foreign workers make to the US economy and society. Meanwhile, the strategy should focus on the how migrants can supplement America’s flagging labour supply; allowing the evolution of the innovation economy. Strict numerical targets are problematic, but the historical norm of net immigration of roughly 1 million annually might meet these criteria (Chart above).
The Chart above illustrates the valuable contribution immigration has played in recent years. Since 2019, the native-born US labour force has declined. Fortunately, the availability of foreign workers helped the US economy cope with the labour shortages during the post-Covid recovery; helping prevent even higher inflation. Indeed, the Congressional Budget Office estimates the recent surge in immigration will add 2.4% to GDP during the next decade, and contribute to reducing the budget deficit.
To be sure, the pressures on public services (health, education, housing, etc.) caused by large-scale migration must be remedied, if local community support is to be sustained. However, an immigration policy centred on mass deportation and draconian restrictions on migration is unlikely to satisfy the needs of the innovation economy or to meet the nation’s upcoming demographic challenges.