Americans entered the 2024 election season deeply frustrated with the economy despite abundant jobs, low unemployment, and no threat of recession. Most of their angst stemmed from inflation, but housing shortages and unaffordability also contributed. Meanwhile, consumers went on a post-pandemic spending spree that now shows signs of winding down.
As of this writing, in mid-August 2024, voters are roughly evenly divided over whether they like Trump’s or Harris’s economic plans better. I use the term “plans” loosely, because neither candidate has been very specific about their economic plans.
Trump’s marquee economic proposal is tariffs, which he claims will “make China pay.” But tariffs get passed on to consumers, and raise retail prices. They work like a value added tax (VAT); it’s hidden, so you don’t see it, but you pay it. He also wants to cut corporate taxes and extend his 2017 tax cuts for the rich, a reflection that “trickle-down” economics, which was discredited decades ago, is still Republican doctrine. So, the main elements of Trump’s economic program are based on false premises, and therefore are false promises.
Trump also opposes immigration, and wants to deport migrant workers, which will keep our workforce from growing and exacerbate the worker shortage. Noncitizen workers pay Social Security and Medicare taxes, and get no benefits in return, and Trump’s policies if implemented would cause the Treasury to lose those revenues and worsen the underfunding of those programs.
Some Trump supporters have touted his success as a businessman as a reason to vote for him, but we know now his ventures lost money and he was a failure in business. In any case, you can’t run government like a business, they’re two different animals, and a business background isn’t a credential for governing. That’s why universities have separate schools of business management and public administration.
Harris unveiled a series of economic proposals on Friday, August 16, 2024 (see story here). Its headline elements are listed below (the bullet points are quotes from Yahoo News). I’ll comment on them individually.
- Combating “price gouging” on groceries and food by authorizing the Federal Trade Commission to impose large fines on grocery stores that impose “excessive” price hikes on customers.
- Eliminating medical debt for millions of Americans, possibly by using federal funds to buy and forgive outstanding debt from health providers.
- Capping the out-of-pocket cost of insulin at $35 per month for all Americans.
- Limiting Americans’ annual out-of-pocket spending on prescription drugs to $2,000.
- Providing up to $25,000 in down payment support for more than 1 million first-time home buyers.
- Calling for the construction of 3 million new housing units over the next four years.
- Expanding an existing tax incentive for developers who build affordable rental housing.
- Removing tax benefits for Wall Street investors who bulk buy single-family rental homes.
- Preventing corporate landlords from using algorithmic price-setting tools to increase rents by large margins.
- Passing a child tax credit that would provide $6,000 per child to families for the first year of a baby’s life.
- Expanding the Earned Income Tax Credit for lower-wage workers by up to $1,500.
The first question to ask is, did price-gouging on groceries and food actually happen? To find out, I looked up the annual profits of several major publicly-traded grocery chains and food processing companies, using Value Line for this purpose, and found some of these companies’ profits spiked during the pandemic and then fell back, while others showed steady profits throughout the 2018-2023 period; so the answer is, it depends on the company, but there’s evidence some took advantage.
Harris’s policy response falls into the “windfall profits” classification. When companies gouge consumers, you go after them with fines and enforcement actions. But this is squishy politics. Often a public perception that companies are making “windfall profits” isn’t reality. For example, if gas prices spike at the pump, people assume oil companies are raking in massive profits, but oil company profit margins are similar to businesses in general. This doesn’t mean price-gouging doesn’t happen, but when it does, the Department of Justice and FTC already have tools to combat it through antitrust enforcement and laws against price-fixing. Republicans are less inclined to enforce these laws. Here’s an example of alleged price fixing that should be investigated.
Before Obamacare, medical debt was the leading cause of personal bankruptcy in the U.S., and even people who managed their finances responsibly were ruined by medical bills — including people with health insurance, because of coverage gaps and the infamous “pre-existing conditions” clause. This was/is a national crisis, beyond the control of individuals, and therefore appropriate for government intervention. We can debate what form such intervention should take, but “interfering with free markets” doesn’t belong in that debate, because there is no free market or price competition in health care. You don’t even know what you’re being charged until you get the bill showing a $500 charge for a nurse giving you an aspirin. I’d put using government money to pay off medical debt in the same basket as forgiving student debt, and it’ll be unpopular with some folks for the same reasons. It’ll also be very expensive.
Capping insulin costs is a form of price control, and government management of prices interferes with the market’s supply and demand mechanism, causing market distortions. So, price controls usually are a bad idea, their main effect being to limit supply and create shortages. But there are exceptions, as when you have few suppliers, the product is a matter of life-and-death for those who depend on it, and producers have a captive market. A $35 price cap shouldn’t drive private producers (there are three serving the U.S. market) out of the market, because insulin costs only about $2 to $10 to make, so they can still make a profit. This is a case where sufficient incentive still exists to make the product, while using price control to protect captive consumers from price-gouging.
Limiting personal out-of-pocket prescriptions expenses to $2,000 (or some other number) isn’t price control and doesn’t lower the cost of drugs. While specifics are lacking Harris probably intends for government to make up the difference, either directly or through some device such as a tax credit. Either way, I’d put this proposal in the “government subsidy” subsidy basket. It adds to spending and deficits. Here, I’ll add that not only Republicans, but many economists, are expressing concern about current deficit levels, which not only pile on more debt and increase federal interest expense, but are inherently inflationary.
It isn’t clear how Harris intends to provide “$25,000 of down payment support” to first-time homebuyers, because details are lacking, but I’m guessing this most likely would take the form of a tax credit rather than a direct payment. Saving a down payment is onerous, and has always been difficult for young families, requiring sacrifice. Private lenders want a down payment as a cushion in case the borrower defaults, so they get their loan back. In the past, the government has assisted first-time homebuyers by setting up programs like FHA and VA that enable them to buy a home with a low or no down payment; these work by insuring the lender against loss if the loan is defaulted. Gifting $25,000 to some homebuyers will be resented by others who made sacrifices to save a down payment and paid it with their own money, so this proposal could run into serious political opposition.
“Calling for construction of X units of housing over the next four years,” whether it’s Biden’s 2 million figure or Harris’s 3 million, what the heck is that? Waving a magic wand to make housing units appear? Builders are already building more homes and apartments as fast as they can, but are constrained by labor shortages. More immigration could help solve that, but Trump opposes immigration.
We have a housing shortage because Republicans deregulated the mortgage lending industry, which led to a housing crash, which resulted in a multiyear cessation of residential construction while the population kept growing. If you don’t want this to happen again, don’t vote for deregulation policies. The market, left to its own devices, will clear the shortage, but it’ll take several years for housing stock to catch up with population, and there aren’t many ways government can’t speed that up. Where new construction is being held back by zoning restrictions, that has to be addressed at state and local levels.
Housing affordability has spawned a complicated, multi-faceted debate. The housing shortage has driven up home prices and rents. That’s a market factor. Meanwhile, cost factors prevent cheap housing from being built. More stringent building codes have increased costs, and so have costs of land, labor, and materials. In my neighborhood, building lots can be obtained only by tearing down older structures. Efforts to limit urban sprawl limit the land base for new housing; builders can no longer put up more houses by going “farther out.” Programs have been devised to incentivize developers and landlords to set aside some units at below-market rents, but these program usually are aimed at target groups like low-income seniors. Because it’s difficult to rein in building costs, most of what government does in this area will have to take the form of subsidies, so boosting federal activity in this area implies more spending, adding to deficits.
My own reading suggests the outcry over “Wall Street investors” snapping up rental houses is overblown, as hard data indicate institutional investors own less than 1% of America’s single-family rental homes. This sector is dominated by mom-and-pop landlords. I’m not sure what yanking Wall Street’s tax benefits would accomplish; it’s probably campaign rhetoric more than anything. On the other hand, “algorithmic price-setting” is price-fixing that simply substitutes computing for talking with other landlords, and you can regulate this like any other monopolistic practice by bringing it under existing laws. But you’re not going to get more regulation from a Republican administration, although in the hands of progressive politicians there’s a risk of overdoing it, which could lead to supply impairment by driving landlords out of the business.
The child tax credit and earned income tax credit are both established strategies for helping lower-income families and individuals make ends meet. They either reduce tax revenues or are direct subsidies, but either way, they’re a form of spending that increases deficits. This is a question of where your priorities lie, reducing deficits or supporting a social safety net. Republicans complain Americans aren’t having enough children, but many people can’t afford to, and won’t unless they’re helped in some way. Also, if you want more children, you’ll need more child care, and it’ll need to be more affordable. Most families need two incomes to make ends meet, and the economy needs their labor, but right now child care is an expense that only more affluent families can afford.
Speaking of spending and deficits, a couple of myths need to be cleared up. First of all, it isn’t true that government borrowing is “a debt that future generations must pay.” Government debt has no time limit and can be rolled over forever and, in practice, is. When was the last time any of us paid taxes to pay down national debt? It doesn’t happen. Second, there’s no such thing as the government “going bankrupt.” A government that prints its own money can’t go bankrupt, it just prints more money. In reality, government debt is “paid off” through inflation, and inflation is a tax. Let me say that again: Inflation is a tax.
There’s no free lunch in economics. The pandemic checks handed out by the Trump and Biden administrations were financed with borrowing. When I got that money, I knew inflation would claw it back, so I saved it to help pay the higher prices for everything from groceries to utility bills that I knew were coming. For some, who lost jobs during the pandemic, it was necessary survival money; but others treated it as spending money, which it wasn’t, and when inflation reclaimed it they were caught back on their heels.
Trump has said if elected again, he wants a say in how the Federal Reserve sets interest rates. This is a terrible idea. The Federal Reserve is insulated from political pressures for a very good reason. While their decision-making isn’t perfect, it’s based on data, math, and economic principles. If you let politicians meddle with interest rates for political reasons, it will have offsetting effects. Cutting interest rates right now likely would bring inflation roaring back to life.
Based on their campaign promises, both Trump and Harris would add to deficits, Trump by reducing tax revenues, and Harris by increasing spending. Higher deficits will make it more difficult to cut interest rates, because you need higher interest rates to offset the inflationary impact of deficit spending. There are additional reasons why bigger deficits aren’t a great idea right now (see article here).
As a matter of political reality, many if not most of these campaign promises will never be enacted. This doesn’t mean the difference between the candidates have no practical impact. Democrats believe in using government to solve problems, including economic problems; whereas Republicans want government to get out of the way and let markets solve those problems. But there are problems markets can’t or won’t solve, and some market failures aren’t self-correcting and require government to step in to restore market functioning.
The parties’ and candidates’ different policies also favor different groups; Republican policies favor business and wealthy individuals, while Democratic policies are oriented to improving the lives of workers and helping the poor. On balance, Harris’s policies are likely to benefit more people, and with more compassion than you’re likely to get from Trump.
