Mark Twain, if he were alive today, would likely update his famous refrain to “Lies, damned lies, statistics and politics.” I want to state emphatically that I am not “political,” and this is not an attempt to be political. The problem is that politics, markets, and economics are all intertwined, and everything I write is aimed at being analytical rather than judgmental.
First, let me address the latest Goldman Sachs report, which claims that a victory by Donald Trump in the coming U.S. presidential election would be more damaging to the economy than a win by Kamala Harris. I have no idea what the Goldman model posits, but it likely underestimates the multiplier impact from corporate tax hikes – depressed profits, a negative capex cycle, and the detrimental effect on job creation and consumer spending. This swamps the impact of giveaway tax credits to low-income households (which will be used to meet their food, rent, and utility bills but do little to spur the cyclical segments of the economy).
Second, and believe me, I am not at all part of the Trump base, but the fact is that all Mr. Trump intends to do from an economic perspective is to extend the policies of his 2016-2020 tenure, which delivered 2.8-per-cent annualized real GDP growth from the time he got elected to the time the pandemic unraveled the economy in early 2020.
Employment over this time frame expanded by seven million. The unemployment rate fell to 3.5 per cent from 4.7 per cent, and this occurred even with the labour force participation rate expanding to 63.3 per cent from 62.7 per cent. Despite all the hue and cry over how his immigration curbs would impair the labour market, up until COVID-19, the labour force managed to surge by five million, or over 3 per cent. The share of the population that was employed sat at 61.1 per cent by the time the pandemic hit, up from 59.7 per cent when he first got elected. And his tariff policies, in the end, did not generate the inflation that so many pundits claimed it would.
So, love or hate him, his policies fostered 4-per-cent annualized growth in volume capital spending compared with less than 3 per cent under the current administration, even with the Chips Act and an array of other subsidies that were meant to boost the economy. All of that goes to show that there is no antidote for growth in the productive capital stock other than good old-fashioned reductions in top marginal tax rates.
Because of the massive US$2-trillion pandemic stimulus checks doled out in early 2021, what the Biden team engineered was a consumption society, with 3.4-per-cent annualized growth in household spending, doubling what the Trump policies managed to accomplish. But tax gimmicks to incentivize consumers to spend are not a replacement for the durable benefits from all the multiplier impacts that flow from business spending and the associated deepening in the productive private-sector capital stock.
I can’t imagine that this sort of rational economic thought would ever make it on the campaign trail since it would be over most people’s heads, and let’s face reality, which the Democrats have certainly figured out – nothing works better in an election race than playing the role of the Candy Man.
Third, I find it amazing that the Democrat ticket is suddenly so concerned about inflation – the inflation their party helped create. Cheering over the fact that inflation is now below 3 per cent is a small consolation since this 3-per-cent inflation rate compounds off a price spiral from 2021 to 2023 that has completely eroded real purchasing power for the working class. While virtually everything that comes out of Donald Trump’s mouth needs to be fact-checked, the Democrats seem to be getting a free pass – but not from me.
The party whose fiscal policies generated a sugar-high in terms of consumer spending also led to the most pernicious inflation experience in over four decades. And while the government doled out stimulus checks and pledges to continue to run an economy on tax credits and subsidies, what actually happened to the workers of the country since November, 2020, was the inflation that was created generated a 3.4-per-cent contraction in real average weekly incomes. Over the entire Trump era, real work-based incomes expanded by 7.7 per cent, so I have to say, there was no need to be dishing out the candy like it was Halloween.
I can understand that this is not going to make Democrat supporters (or Trump haters) very happy, but these are the facts. If the election comes down to character and personality, Ms. Harris wins. But if the economy emerges as the No. 1 issue, then it may be a different story. The truth is that the Democrats own the massive bulge in prices over these past nearly four years, but the problem with Mr. Trump is that he spends too much time on personal attacks than staying on point. Any other GOP candidate would be running away with this thing based on what has happened with inflation alone.
However, both parties share the shame of bringing the United States into a state of budgetary incompetence. The national debt under Mr.Trump from 2016 to 2020 surged nearly US$8-trillion and that was then matched by what President Joe Biden has accomplished in his near-four-year term. Neither party can claim high ground on this issue when they both just run up the debt to stratospheric levels and pray that the U.S. doesn’t sleepwalk into a fiscal crisis like Canada did in the early 1990s.
But what is most critical is what the two policy plans mean for inflation. It remains to be seen if Mr. Trump actually ends up embarking on a massive and broadly based run-up in tariffs. That seems more like a threat, but who knows? If he does as he says, it will not be inflationary in a classic sense, but it would surely represent a one-time shock to prices and real wages, and it would offset much, if not all, of the other pro-growth aspects of his proposals.
The view that his immigration curbs would lead to an inflationary spiral ignores two realities: (i) this never happened in his first term, and (ii) at six million, the number of unemployed American citizens is 15.5 per cent higher today than it was before COVID, and that represents a homegrown source of labour supply which undoubtedly will be tapped. Outside of the COVID-19 spike, this is one of the largest pools of domestically based idle labour since 2017.
The Harris plan is far more problematic when it comes to inflation, which does make her emphasis on containing inflation through price controls rather fascinating. To gauge where inflation is going, you need to know what is going to happen on the demand side and on the supply side of the economy. Ms. Harris’s spending program, especially on the multitrillion Green New Deal platform, will cause the aggregate demand curve to shift up and to the right. But the real dilemma lands on the supply side. Her plans to tap unrealized capital gains will surely weigh on the equity market, not to mention raising the top rate to 28 per cent from 20 per cent for those earning US$1-million or more. And her proposal to hike top marginal corporate tax rates will also impinge on capital spending plans.
When we trace through all the effects here, it leads to a downward slope in the aggregate supply curve. So, if you can picture these two curves interacting, it leads to higher inflation and stagnant growth: in other words, stagflation – that dreaded word I have not used in decades.
The real issue is that even as the policy plan delivers more tax credits to low- and middle-income earners, it is the business sector that determines the trend in productivity. The negative effects on capital formation are critical here because we all know from basic economics that the reduction in the capital-labour ratio (perhaps good social policy from an income redistribution standpoint, but beware the laws of unintended consequences) will impair the one bullish development the economy has going for it right now, which is productivity growth. That ends with these tax policies that hit squarely on capital and risk-taking. This is not well advertised because it is not well understood – that real wage growth inevitably converges with productivity growth.
All these Robin Hood policies that seem so positive on the surface will actually trigger a slump in profits.
There is much to be desired in both plans, to be sure, but the party that presided over the inflation bulge these past three years will only serve to exacerbate the inflation if the policies being advertised come to fruition. That will indubitably cause a headache for the Fed, and it will also create a migraine for me as far as my long-standing bullish call on bonds is concerned.
So, no matter who wins the keys to the White House, what we should all be praying for is a split government. Checks and balances mean fiscal gridlock and no nonsensical policies getting through both the House and the Senate. In other words, gridlock is good and a result that investors (and society) should be hoping for.
More from Rosenberg Research: These will be the stock market sector winners and losers after the U.S. election
David Rosenberg is founder of Rosenberg Research.
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