Regardless of who wins November’s US presidential election, Vice President Kamala Harris or former president Donald Trump, there is little doubt that the outcome will have a profound impact on the country’s political climate. The economic implications, however, are less clear, owing to Trump’s lack of interest in policy and the Harris campaign’s efforts to divert attention from the increase in grocery prices under Joe Biden.
So far, financial markets have remained largely indifferent to the election, perhaps because investors assume that neither Harris nor Trump will secure control of both houses of Congress, limiting their ability to enact meaningful legislation. With polls and betting markets predicting an exceptionally close race, it is reasonable to conclude that political deadlock is the most likely outcome. But is it? In my view, the odds of a Democratic sweep are increasing, and investors would be wise to pay attention.
Ever since Biden ended his re-election campaign and Harris began her remarkable ascent, Republicans – or, more accurately, Trump – seem to be playing checkers while Democrats are playing chess. Although the GOP has no shortage of sharp strategists, the party’s leader either ignores their advice or lacks the focus to follow it.
By contrast, the Democrats are running a remarkably disciplined campaign, largely keeping Harris from press interviews and unscripted moments, with the one exception being her Thursday sit-down with a highly sympathetic CNN correspondent and her running mate, Tim Walz, on hand for support. This strategy has proven highly effective, with Harris radiating charisma and energy in her meticulously crafted speeches and easily holding her own in her first interview. Trump, after a decade of dominating the news cycle, finds himself sidelined and struggling to reclaim public attention.
Should the Democrats win the White House, hold the Senate, and retake the House of Representatives, Harris will be able to enact sweeping economic reforms. Eliminating the Senate’s filibuster rule, as Democrats have repeatedly vowed to do, would enable her administration to run roughshod over Republican opposition even with a narrow majority. Although this strategy would undoubtedly pave the way for Republicans to do the same when they eventually return to power, potentially leading to long-term volatility, the Democratic leadership appears unfazed.
Nevertheless, gaining control of the executive and legislative branches would enable Harris and the Democrats at least partly to address the US deficit – projected to reach $1.9 trillion in 2024 – and mounting long-term debt by passing much-needed tax increases. Harris has already proposed raising taxes on the rich and corporations in order to generate $5 trillion in new revenue over the next decade. But she will struggle to implement her ambitious progressive plans without raising the deficit or breaking her promise not to raise taxes on anyone earning less than $400,000 per year. While Harris says she wants to “turn the page” on Donald Trump and the past decade of American politics, she has offered little clarity on what the next chapter might look like.
To be sure, Trump has also proposed tax increases, albeit in the form of a universal 10 per cent import tariff and a 60 per cent tariff on Chinese goods. Given that the US imported goods worth more than $3 trillion in 2023, this approach could indeed generate substantial revenue. Notably, tariffs are common in developing countries with weak tax-collection systems.
But despite Trump’s claims to the contrary, his proposed tariffs – though technically levied on foreign companies – would ultimately lead to higher prices for US consumers, who would bear the brunt of the costs. Moreover, foreign countries will inevitably retaliate, further driving up the cost of imported goods.
Neither Trump nor Harris seems particularly interested in reducing the deficit. Harris’s economic plan includes several costly measures, such as restoring the Biden administration’s child tax credit and offering subsidies to first-time home buyers. Given Harris’s background as a progressive Democrat from California, one suspects her spending agenda will eventually go well beyond these initial proposals.
Trump has promised tax cuts for everyone, vowing to make Social Security benefits tax-exempt not just for low-income retirees but also for the wealthy, who pay higher tax rates and thus stand to benefit the most. Needless to say, this approach is reckless.
When it comes to the Federal Reserve, the contrast between the two candidates becomes even clearer. Harris has pledged to respect the Fed’s independence, though she would likely appoint dovish officials who favour keeping interest rates low, even at the risk of higher inflation. Trump, for his part, has suggested that the president should have a “say” in Fed discussions – a throwback to the days before central-bank autonomy. Considering Trump’s tendency to monopolise conversations, one must wonder if anyone else would have a chance to speak.
Ideally, neither side will emerge from November’s election with the power to impose its will. But if one party does end up controlling the White House and both houses of Congress, it is much more likely to be the Democrats than the Republicans. While any Harris victory would be better for America’s soul, what it would mean for the economy is far less clear.
Kenneth Rogoff
The writer is Professor of Economics and Public Policy at Harvard University and recipient of the 2011 Deutsche Bank Prize in Financial Economics
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