Economic discontent and presidential solutions

As we approach the election in November, it behooves us to be clear about the nature of the issues that concern us, to ascertain which president or administration will likely steer us in the right direction. As an economist, I tend to think that many among us are misrepresenting the source of our discontent. Specifically, complaints about the state of the economy and the high rate of inflation are both off the mark. By almost all objective measures, the economy is reasonably healthy, with an acceptable rate of growth and low unemployment; and inflation has been generally improving for more than a year.

That said, a pervasive dissatisfaction exists largely in connection with affordability.  That is, despite the improvements that we’ve been witnessing on the inflation front, prices on many goods, in particular housing and food, are still markedly higher today than they were prior to the pandemic.  When people complain about the economy or inflation, I think those statements are misdirected. They’re really complaining about the fact that prices and costs are higher than they had been, translating to paying more for less. People don’t like that.

Unfortunately, the idea that any candidate for president can unilaterally solve this affordability problem quickly or easily is fanciful. At the same time, if we correctly characterize the problem as affordability, we should be able to evaluate whether any policy proposals that the candidates present will exacerbate or alleviate that concern. 

Those who support Donald Trump invariably associate him with an earlier time when prices were lower; and, somehow, they seem to believe that returning Trump to the White House will re-set the price clock and return us to an era in which we’ll be able to experience lower prices.  What we have here is a breakdown of critical thinking.

Putting the rhetoric about correcting the evils of the deep state aside, with respect to purely economic policies, we can reasonably expect the following from a second Trump administration, if given the opportunity:

• Extension and likely expansion of the income tax cuts originally passed under the Tax Cuts and Jobs Act that Trump signed, many of which are slated to expire in 2025.
• Sharp reductions of immigration and ramping up of deportations of undocumented immigrants. 
• Additional tariffs on imported goods.

None of these policies will help with the affordability issue. All will act to raise prices for American businesses and consumers.

Reducing taxes adversely affects affordability in a broad-brush manner, giving more discretionary income to consumers and businesses, allowing for higher demand and therefore upward price pressure.   Reductions of immigration and increases in deportations would reduce the supply of labor, cause labor costs to rise, and thus foster higher prices more broadly. The agricultural sector would be disproportionately affected, exacerbating the issue of affordability for food.  And finally, we should all be clear that tariffs are paid by the purchasers of foreign products (i.e., domestic consumers and businesses). In fact, perhaps the most immediate policy action that any administration could take to virtually instantaneously lower the cost of goods Americans buy is the reduction or elimination of tariffs, not increasing them.

These three planks seem to be the pillars of any coming Trump administration, and none of them will do anything to ameliorate the economic discontent that Americans are feeling with respect to affordability.  Just the opposite.

The contrast between the prospective programs of Biden and Trump is stark with respect to tax policy. While Trump is looking to protect and extend the tax cuts for the wealthy, Biden is hoping to pass legislation that would raise income taxes on high earners and corporations.  Trump’s policy is unambiguously inflationary; Biden’s is deflationary.  Critically, reducing inflation is not the same as lowering prices.  That said, if high prices are the concern, a deflationary fiscal policy, which would dampen upward price pressure, should clearly be the preferred policy alternative.

On the immigration front, Biden had negotiated a bi-partisan immigration bill that had acceded to many Republican preferences. At Trump’s insistence, however, the House failed to pass that bill. Since then, Biden has begun talking tougher about immigration, advocating using administrative action to close the border when illegal immigration exceeds certain limits. At the same time, the differences between the two positions are profound. Trump is pressing for mass deportations of undocumented immigrants. Biden, on the other hand, is looking to expand protection from deportation for longtime undocumented immigrants who are married to American citizens, and enabling them to work here, legally. 

Finally, with respect to tariffs, both Biden and Trump seem to be advocating for higher tariffs – particularly on Chinese imports.  Biden’s proposals seem more directed to electric vehicles and green energy-related products, while Trump’s program seems to be larger and more ubiquitous.  Both, however, reflect an accommodation to protectionist instincts.  The winners would be shareholders and workers in those industries spared from competition by the tariffs. Losers, on the other hand, are the rest of us who necessarily must pay more for goods and services than we otherwise would have to, in the absence of the tariffs.  Obviously, we have competing interests here; but at a minimum, we should recognize that tariffs come at the expense of addressing the problem of affordability.  Let’s be honest about that.

With these respective policy platforms relating to taxation, immigration, and tariffs, I can’t say that a Biden’s administration will necessarily mitigate the frustration so many Americans harbor with respect to affordability; but I can say that under Trump, the problem is more likely to worsen, rather than improve.