Trump versus Harris: Conflicting economic visions for America

Preliminary results of the U.S. presidential elections may be known late Tuesday night to early Wednesday morning Eastern Time.

 Polls are mixed, but the latest ones more often gave the Republican candidate, former President Donald Trump, a slightly higher chance of winning than his rival, Kamala Harris, the current Vice President. Participants in betting markets also see a higher probability of Trump’s victory.

The number one topic in this year’s election campaign is the economy, with Donald Trump being more trusted. For example, in a recent public opinion poll by the "New York Times" and Siena College, 52% of respondents said he would be a better economic manager than Harris, whereas 45% thought otherwise.

These opinions are unsurprising, considering how American consumer sentiments have developed in recent years. According to the University of Michigan, the index of these sentiments was 70.5 points in October. This is above the average of the last four years, during which Democrat Joe Biden has been in the White House, but below any time during his predecessor and potential successor's tenure.

Even in 2020, the last year of Donald Trump’s term, when employment in the U.S. plummeted due to the COVID-19 pandemic and the unemployment rate surged, Americans rated the state of the economy and their finances better than today. Meanwhile, although she announces an income tax cut for most households, Harris is seen as a continuation of Biden’s policy.

A glance at the main U.S. economic indicators under Trump and Biden shows where the dissatisfaction of recent years comes from. Biden's term was marked by significantly higher inflation and hampered household purchasing power growth. From February 2021, the first full month of the outgoing president’s administration, to September 2024, consumer prices in the U.S. grew at an average annual rate of 4.4%. During this time, the price level increased by almost 16%. During Trump’s four-year term (from February 2017 to January 2021), inflation averaged 1.5%, with the price rising only by 6.6%.

As a result, the median (middle) U.S. household income in 2020 (the last full year of Trump's presidency) was 8% higher in real terms than in 2015, despite a decline during the pandemic year of 2020. Under Biden’s administration, real income also grew but to a much lesser extent. By the end of 2023, not accounting for a potentially better 2024 in this regard, it was only 1.3% higher than in 2020.

The Democratic staff argues that although Biden's administration had to combat high inflation, the phenomenon itself had little to do with its decisions. The energy shock from Russia's attack on Ukraine, the rebound in consumption after the COVID-19 pandemic, and supply chain disruptions contributed most to rising prices. This consumption boom, coinciding with a restricted supply of goods, was partly due to the Trump administration's anti-crisis policy in 2020, especially cash transfers to households. Biden's administration also attempted to stimulate the economy, but ultimately – as it seems today – this did not prevent the Fed from quelling inflation.

From the perspective of consumers and voters, the discussion about the causes of inflation is secondary. Under Trump, incomes grew faster than under Biden, despite a clear improvement in the U.S. labour market during the latter period. In recent months, employment growth in the U.S. has slowed. Yet, the number of non-farm jobs in October 2024 was 16 million greater than in January 2021 (these are seasonally adjusted data, making them comparable across different months). Under Trump's administration, employment decreased by nearly 3 million people.

This comparison is somewhat unfair, as Trump’s presidency was burdened by the drop in employment during the 2020 pandemic-induced economic paralysis. Biden is credited with the rebound in employment in 2021. But even if these disturbances are ignored, the Democratic president's tenure was more successful in this regard than the Republican's. From the beginning of Trump’s presidency to the end of 2019, the number of non-farm workers increased by almost 6 million. It is over 7 million more than at the end of 2019.

If American voters choose Trump instead of Harris, mainly remembering the high inflation under Biden, they'd likely be going from the frying pan into the fire. Economists essentially agree that a return of the Republican candidate to the White House would further spike inflation. This would limit consumer demand and lead to a more restrictive monetary policy, hampering economic growth. In the extreme scenario, the U.S. could face stagflation.

There are few precise forecasts, as the extent to which the future president can implement his promises also depends on the balance of power in Congress. Elections to both houses of Congress (for the Senate, this concerns one-third of the seats) are held simultaneously with the presidential elections. Therefore, economists typically provide variant forecasts: how much they would change their baseline scenario depending on which parts of the programs would be implemented and to what extent. Such forecasts' clarity is hindered by the fact that basic scenarios already rely on some assumptions about the economic policy of the next administration.

For example, Rabobank economists assume that after the elections, Congress will remain divided as it is today, i.e., one chamber dominated by Republicans and the other by Democrats. Such a division limits the president's room for manoeuvre on fiscal matters, leaving them some freedom, for example, in trade policy. Under these assumptions, trade policy has a crucial impact on forecasts depending on who will sit in the White House.

Rabobank economists predict that U.S. inflation in the next two years (2025/26) would average 3.6% if Trump wins and 2.6% if Harris wins. This would influence the Federal Reserve’s stance.

In the first scenario, the Fed’s main rate at the end of 2026 would be 4.25%, compared to 5% currently, and in the second scenario, 3.5%. This would impact the pace of U.S. economic growth. Under Trump, U.S. GDP would increase by 1.7% in 2025, 1.2% in the following year, and 1.9% in 2027. Under Harris, growth would be 1.9%, 1.9%, and 2.1%, respectively. It would, therefore, be 0.4 percentage points higher on average, although still relatively low historically. According to analysts from the Dutch bank, this is a consequence of the Democratic candidate's promise to raise taxes on companies, which would stifle investment growth.

However, the authors of this forecast emphasized that they assumed a lower increase in import tariffs than Trump announced. The minimal universal rate (i.e., affecting all trading partners and goods) would rise to 5% instead of 10-20%. Currently, the U.S. doesn’t apply such a rate, but the average import duty rate is 3%. However, if the minimum duty were to be 10%, economists from Rabobank estimate that inflation in 2026 would average 5.4% instead of 4%. This underscores the significance of trade policy details.

In addition to introducing a minimum tariff rate, Trump promises a drastic tariff increase on goods imported from China. They should be at least 60%, but in some cases up to 100% - as it is today concerning electric cars. Kamala Harris’s team, which only announces selective increases in tariffs on Chinese goods, claims that her opponent’s proposals would effectively tax American consumers. Economists’ estimates seem to confirm this. For example, analysts from Capital Economics believe that all of Trump's trade policy ideas would push inflation up by two percentage points almost overnight.

But trade policy is not the only reason why, under Trump, in the eyes of economists, inflation would increase. The decisive reduction in immigrant inflows, also pledged by the Republicans, and changes in fiscal policy would act in the same direction. Although Trump formally expresses concern about U.S. public finances, his tax and spending proposals would likely lead to a significant deepening of the deficit and an increase in national debt. Fiscal policy announced by Harris would also be expansive but to a lesser extent.

Thus, according to the Committee for a Responsible Federal Budget, implementing Trump's promises, including maintaining the temporary individual income tax cut from 2017 and reducing the tax on domestic corporate income from 21% to 15%, could, in the extreme case, increase U.S. public debt to $15.5 trillion by 2035 from about $36 trillion currently. This would raise the debt to about 160% of GDP from just under 100%.

For comparison, simulations by the Congressional Budget Office suggest that maintaining the current legal status would increase the debt over this horizon to 125% of GDP (this refers to net debt, excluding parts of U.S. government debt held by public entities; considering such liabilities, the U.S. public debt already exceeds 120% of GDP).

Considering political and market barriers to such a debt increase, in the most probable scenario, U.S. government liabilities would rise by 2035 to 143% of GDP.

Kamala Harris announced increasing corporate profits tax to 28% and higher levies on affluent individuals. Simultaneously, she wants to maintain or expand household tax cuts for those earning up to $400,000 annually, which Trump introduced. As economists from Goldman Sachs predicted, her program would also lead to slightly faster employment growth than Trump’s program. This, in turn, would increase the tax base.

On the other hand, an increase in import tariffs would not compensate for the budget revenue shortfall. Nonetheless, in the extreme scenario, the current U.S. Vice President's ideas would cause the U.S. public debt to rise to 144% of GDP and, in the most probable scenario, to 134% of GDP.

In summary, according to prevalent economist forecasts, Trump's broad economic policy would negatively impact the economy more negatively than Harris’s policy and would also be more costly.