Ready! Set! Go!
Presidential elections typically gather steam after Labor Day.
Published August 30 2024
Bottom Line
By any historical standard, the past two months of the presidential election journey have been extraordinary. First came President Biden’s dreadful debate performance June 27, followed by the attempted assassination of former President Trump July 13, a raucous Republican National Convention the following week and Biden’s withdrawal July 21. The Democratic National Convention was an enormous success, reinvigorating the party’s energy, optimism and enthusiasm for its new candidate, Vice President Kamala Harris. While the “joy vibe” soared at the convention, it was light on policy details, ameliorated by Thursday’s CNN interview with Harris and her running mate, Minnesota Gov. Tim Walz.
The race is now a coin flip, setting the table for two much-anticipated debates: Trump and Harris Sept. 10 on ABC; Walz and Ohio Sen. J.D. Vance Oct. 1 on CBS. Voters begin to form judgements on fiscal policy after Labor Day. Both candidates have been reluctant to discuss their plans to reduce a record $35 trillion in Federal debt and a total debt-to-GDP ratio of 125%, focusing instead on populist proposals. But we’re expecting that to change as we grind toward Nov. 5, with early voting starting on Sept. 16 in Pennsylvania.
Harris as the ‘change’ candidate The issues many voters and investors deem most important include inflation, immigration, border security, crime, economic growth, energy and the federal debt. Harris is promoting herself as the candidate of change, promising to implement better policies. That’s tricky, as she must distance herself from some plans implemented by the very administration she is a part of. Some voters may instead hold her accountable. Consequently, Harris has been stingy on specifics to date, choosing to focus on Trump’s status as a convicted felon, the January 6 insurrection, abortion rights and his 2017 corporate and individual tax cuts.
Lower inflation During the CNN interview, Harris discussed her proposals for an “opportunity” economy, pledging to turn the page on some of Biden’s policies and plot a new way forward. An important component of her plan is reducing the cost of consumer goods, whose spike over the last four years she blames on corporate greed and price gouging. But most companies contend that they must pass sharply higher costs—such as materials, labor, energy, transportation and insurance—onto consumers to maintain profit margins. S&P 500 operating profit margins, which were about 13% pre-pandemic and plunged to 9% in 2021, have returned to 13%.
So, while the growth in nominal CPI inflation has plunged from an annualized 41-year peak of 9.1% in June 2022 to 2.9% in July 2024, prices today are still 20-25% above where they were pre-pandemic.
Housing out of reach The median price of existing homes (which account for 84% of all housing activity) has surged 60% from January 2020 ($266,000) to a record $427,000 in June 2024, for a 14.8% compound annual growth rate. In conjunction with a near tripling in mortgage rates to 8% over the last four years and negative real wage gains due to the spike in inflation, housing affordability hasn’t been this poor since the mid-1980s. Harris wants to provide first-time homebuyers with $25,000 for down payments.
Extend the 2017 tax cuts? Trump wants to extend, and make permanent, the corporate and individual tax cuts he put in place in 2017. But a static analysis suggests that the federal debt and deficit could widen by as much as $5 trillion over a decade. Some economists, however, employ a dynamic analysis, which could generate economic activity, corporate spending, employment and wages.
Harris’ tax plan would increase the tax rate on corporations and high net worth individuals, arguing that the rich are not paying their fair share. But according to the IRS, the top 10% of taxpayers in 2021 (the most recent data available) who earn $170,000 or more already pay 76% of the total taxes in the U.S. The bottom half of taxpayers (earning $50,000 or less) pay 2% of the total taxes. The top 20% of taxpayers account for 40% of all consumer spending and consumer spending accounts for 70% of GDP growth, so raising tax rates on top earners too sharply runs the risk of slowing the economy.
Trump reduced corporate tax rates from 35% (the highest in the developed world at that time) to 21% (the current global corporate average) in 2017. That unleased $2.5 trillion in repatriated assets moving back into the U.S. from overseas, according to the Business Roundtable, three-quarters of which companies used to purchase new equipment, build new plants, hire more employees, and increase worker compensation. Dividend increases and share repurchases accounted for most of the balance.
Tariff threat Trump has threatened to raise tariffs on goods purchased overseas to protect domestic markets and raise revenues. We’re not a fan of tariffs, however, because they impede the flow of global trade and result in higher prices to consumers. We hope this stance is a bargaining chip rather than an actual policy proposal.
Federal Reserve independence on the ballot? We have long prized the importance of our central bank’s ability to adjust monetary policy as it sees fit and independent of political pressure. Providing the White House or Congress with input in the process represents a conflict of interest, in our view, because politicians would routinely opt for lower interest rates to spark a hotter economy and a stronger job market to enhance their re-election chances, inflation be damned. So, we think that Trump’s inclination he should have a say in monetary policy decisions is a colossally bad idea.
No taxes on tips and Social Security benefits? When we look up “populist tax policies” in the dictionary, we see “no taxes on tips and Social Security benefits.” Both candidates have signed onto this idea, with which we disagree. The U.S. has $35 trillion of outstanding debt, and we all must pay our taxes.