The Inflation Question Revisited
And the choice now before us
Two weeks ago I posted a note with the title, The Inflation Question: How will Harris respond? In that note I expressed the desire to see Vice-President Harris chart a bold new course and speak straight to the American people about inflation and the economy, leading an objective and honest discussion of how we got to where we are today—with millions of American families still struggling to put food on the table in an otherwise strong economy—and to explain to us all what the federal government can and cannot realistically do to reduce the cost of living. And I did so knowing that such a speech would not likely occur three months before the election, with the outcome still in doubt.
When I wrote my last post, however, I did not realize that in just two weeks both candidates would make speeches laying out their respective economic plans, which occurred last week in the run up to the Democratic convention. The two speeches have gotten a fair amount of media coverage, but not all of it has been objective or even accurate, particularly on social media. And so I thought that it might be helpful to outline what the two candidates did in fact say—not what the media says they said—adding in a few observations and comments of my own, for whatever that may be worth. (Probably about as much as I get paid to write this blog.)
As usual, let’s explore.
The Trump Speech. On Wednesday of last week, Donald Trump spoke for over an hour to 2,000 supporters at an event in Asheville, North Carolina. Trump’s speech was billed by his campaign as a major policy address on the economy and inflation, which Trump himself described as not only “important” but even “intellectual”. But after watching the full event—seventy-five minutes of my life I will never get back— I can confirm that Trump’s speech was little more than another campaign rally, albeit one centered around the theme of inflation and the economy. According to the Washington Post, only 15% of Trump’s speech (by word count) dealt with the economy, and even that portion of the speech consisted largely of a “mishmash of robotic teleprompter pledges and off-the-cuff riffs about whatever happened to be on Trump’s mind”. And as we know, what is usually on Trump’s mind is one thing: Donald J. Trump.
The speech Trump delivered, much of it off-script, was essentially a variation of the “American carnage” theme of his 2017 inaugural address, which former President G.W. Bush aptly described as “some weird shit”. And so when Trump talked about the state of the American economy in 2024, he described it ways that might not be recognizable to many of us who live in the real world. He said that the United States under Joe Biden had become a “third-world” economy, now lying in ruins, with the American Dream dead and America’s global economic leadership a thing of the past. As usual, Trump bolstered his doomsday narrative with a litany of false economic data, stating for example that Americans’ average monthly mortgage payment had tripled over the past three years; the interest rate on new mortgages was now 10-11%'; the price of gasoline was now over $5 a gallon; and the federal debt under Biden had increased by $10 trillion. All of these statements are demonstrably false, of course, which should come as no surprise to anyone who has been following Donald Trump for the past eight years.
Intermixed with his distorted narrative and factual exaggerations, however, Trump did make several concrete statements about economic policy under his next administration. He proposed (1) to extend and expand the tax cuts embedded in the 2017 Tax Cuts and Jobs Act (which by law are currently scheduled to expire after 2025); (2) to exempt Social Security benefits and tips from federal income tax; and (3) to impose 10-20% across-the-board tariffs on imported goods. And along the way, he also promised to cut the price of US energy and electricity by 50% or more within 12-18 months of taking office, by taking a meat axe to federal energy and environmental regulations. Drill, baby, drill!
The Harris Speech. Two days after Trump’s rally, Vice-President Harris made her own economic speech, also in North Carolina (Raleigh). The contrast between the two events could not have been more stark. Harris spoke not in a rented convention center but at the state’s largest community college, Wake Tech, which serves 70,000 adult learners each year. She spoke for approximately twenty-five minutes, one-third as long as Trump, and she stuck closely to her prepared remarks and to the topic at hand, inflation and the economy. She smiled and laughed, thanked other people by name for their efforts, expressed empathy with middle-class Americans struggling to put food on the table, and spoke optimistically and with confidence about the future of America. None of which we heard from candidate Trump.
In her speech, Harris outlined several specific economic initiatives, most notably (1) a renewal and expansion of the Child Tax Credit and the Earned Income Tax Credit, which she said would benefit 100 million Americans; (2) a national target of building three million new affordable homes over the next four years, through targeted tax credits for builders and federal funding for first-time home buyers: and (3) a continuation and expansion of the Biden Administration’s ongoing efforts to reduce prescription drug prices and forgive medical debt. She made a full-throated endorsement of the Affordable Care Act, which now provides subsidized health insurance to 45 million Americans. And she proposed new legislation giving the federal government the authority to go after corporate “price gouging” in the food and grocery business and to penalize corporate owners of rental housing who raise rents by excessive amounts. She also released a Fact Sheet with more detail on her plans, which of course is not something we normally see from the Trump campaign. (Have we ever?)
Can either of the two candidates plans actually become law? This depends entirely on the outcome of the downballot races in November. If the Democrats do not win control of both houses, much of Harris’s plan will not become law. There may be some aspects of her plan (eg prescription drug prices and medical debt forgiveness) which can be implemented under current law, or by Executive Order, but given the current composition of the federal courts, she will likely be constrained in what she can do. And ditto for much of Trump’s plan (the tax cuts), other than perhaps his plans to raise tariffs and slash regulations.
Will either of these plans reduce inflation or the cost of living in America? Not likely, at least not directly. But there are risks that some elements of the two plans would actually increase the cost of living and contribute to renewed inflationary pressures, most notably Trump’s tariff plans. And to the extent any of these initiatives increase the federal debt, which some of them will, adding fiscal stimulus to an already strong economy, the Fed may be forced to respond in ways that American businesses and households may not welcome.
Harris’s plan to pursue ‘price gougers’ in the food and grocery industry has proven to be particularly controversial, with a lot of press and social media commentary, not all of which has been informed or accurate. Anyone who listened to the speech (as I did) will know that Harris did NOT propose to impose price controls on food and grocery items, despite Republican and some media claims to the contrary. She proposed only to go after ‘price gougers’ (whatever that means), and her proposal seems to be modeled after laws already in effect in some states, including red Texas. Most economists (even Paul Krugman) do not believe that price gouging has been a major contributor to food and grocery inflation in recent years, and Harris herself said as much in her speech. Whatever one thinks of Harris’ proposal—and I for one don’t think much of it—this could not reasonably be characterized as a ‘socialist’ proposal, other than perhaps in MAGA land.
Less has been made about Harris’s plans to go after corporate (ie private equity) firms who are buying up large quantities of residential rental housing stock and raising rents aggressively, to the consternation of many local communities. On this issue, Harris will likely have many state and local governments (and consumer groups) on her side, but I think we can reasonably expect substantial push-back from the well-funded housing industry. And even if this proposal somehow makes its way into law, the impact it will have on rental rates across the country may not be significant.
As for Trump’s promise to cut energy and electricity prices by 50% (or more!), this would of course have a significant impact on the cost of living if it were in fact to happen. But for now, most commentators seem to view this as mostly Trump bluster, and not part of any real economic ‘plan’ per se. And even Trump, in his off-script comments during the speech, suggested that he himself does not believe this will happen (but voters will thank him for promising to do it). What will certainly happen, however, is that volatile gas and energy prices will at some point come down further (as is now happening), and when they do Trump himself will take the credit, whether or not he had anything to do with it.
What will these plans do to the federal debt? Well, they won’t reduce it, that’s for sure. And while both political parties make periodic statements of concern about the federal debt, usually in the run up to an election when the other party is in power, neither of them actually seems to care much about this issue, at least not when judged by their actions as opposed to their words.
Both candidates have proposed major tax breaks for their preferred constituencies: Harris for working and middle-class Americans and Trump for corporations and the highest individual earners. And both sets of plans, if not offset with other tax increases or spending cuts, will increase the federal deficit and debt substantially. Harris’s plan will add an estimated $1.7 trillion to the federal debt over a ten-year period, which she plans to offset with tax increases on corporations and the highest-earning individuals. The impact of Trump’s plan is even more extreme and will add an estimated $6 trillion (or more) to the federal debt over the same period, if not offset. About 20% of this impact is attributable to Trump’s plan to exempt Social Security benefits from federal income tax (disproportionally benefiting well-to-do retirees), which will not only increase the federal debt but will also accelerate by one year or more the upcoming funding crises for both Social Security and Medicare. Which I suspect will not be unwelcome to certain Republicans looking for a reason (excuse) to slash retiree benefits. [For the sources of these debt-impact estimates, see here, here and here.]
How important are the candidates’ economic plans to the outcome in November? I truly have no idea, but my guess would be “not very”. We all knew well before last week that the Democrats would look to cut taxes and spend money on working class and middle-class Americans while raising taxes on the rich. And we all knew that the Republicans would attempt to cut taxes (or extend and expand previous tax cuts) for corporations and the rich and if possible cut benefits for the poor. This is what Democrats and Republicans seem to do each and every election cycle and none of it should be surprising.
What is new, I suppose, is the specificity of the two candidates’ proposals, which may be helpful to some undecided voters if they bother to do the research and find out what has actually been proposed. (Which of course most voters will not do.) In any case we simply do not know how many votes the candidates’ economic plans might plausibly shift one way or the other, and I for one would not put too much faith in polls or surveys which attempt to tell us this, if only because so many other more important things are now in flux.
The Democrats seem to be riding high for the moment, following Biden’s decision to stand down, the surprisingly popular selection of Tim Walz as Harris’s running mate, and what looks so far to be a successful Democratic convention. But this is politics, and the world is an uncertain place where ‘stuff happens’. War between Israel and Iran, a big rise in unemployment, another pandemic outbreak, or even the endorsement of Taylor Swift. Any of these things (or others) could have a decisive impact on the election results. We simply don’t know, and I for one will not hazard a guess.
My biggest fear, however, is that we still won’t know the true results of the election after the voting is completed on November 5th. I am cautiously optimistic that the election will go smoothly, with a clear and decisive result one way or the other, but I would not bet on it.
And if we have a repeat of the 2020 election, or the 2000 election for that matter, I fear that all hell may break lose in this country, making the cost of gas and groceries seem pretty unimportant in comparison.
Links
Trump’s Economy Speech, Fox News (Video), August 14, 2024
New Tariffs and Other Takeaways from Trump’s Economic Speech, Wall Street Journal, August 14, 2024
In Economy Focused Speech, Trump Lobs Personal Attacks against Harris, NY Times, August 14, 2024
Harris’s Economic Speech (Video), August 16, 2024
Harris Economic Plan Fact Sheet, August 16, 2024
Harris Calls for Expanded Child Tax Credit, 3 Million New Homes Wall Street Journal, August 16, 2024
Harris Lays Out Her Economic Vision, NY Times, August 16, 2024
Harris Unveils Populist Policy Agenda, Washington Post, August 15, 2024