The U.S. election is less than 80 days away. The race is a dead heat, but only one of them will win and the impact on markets and the economy may be very different depending on who wins control of the White House, the House of Representatives and the Senate.
Will a Trump or Harris presidency lead to different outcomes?
Ex-President Donald Trump was leading after the disastrous debate performance of President Joe Biden, but since the Democrats managed to pull off a last-minute switch of candidates the race has tightened.
Vice President Kamala Harris is expected to continue the policies of the Biden administration while ex-President Trump would be likely to push for more of the policies he pursued in his first term.
Under Biden the Inflation Reduction Act provided large incentives for bringing manufacturing back to the U.S. and especially for renewable energy. A Trump victory would put those policies at risk, while Harris is likely to push to expand the IRA.
One significant action Trump took in his first term is likely to be repeated and expanded. Candidate Trump is proposing a tariff on imports from the Rest of the World (10 percent) and especially China (60 percent), ignoring evidence that the smaller tariffs enacted in 2017 had an impact similar to a tax on the consumer.
If those tariffs were imposed, the Chinese economy would slow about 2-3 percent of GDP. Inflation in the U.S. would be higher by about 0.3 percent depending on consumer behaviour. Other countries would retaliate with similar tariffs. The experience in the 1920s showed that the Smoot-Hawley tariffs contributed to the onset of the Great Depression.
Fiscal policy and reaction to government deficits could be a big difference between the candidates, but either government faces a difficult challenge. As discussed in a May 2024 post, the U.S. is heading for a budget crisis, when government debt as a percent of GDP will reach levels similar to the post-war peak in 1946.
If Trump wins control of all branches of government the deficit could expand. Tax cuts that are scheduled to expire at the end of 2025 would be extended and even lower taxes have been promised for higher income individuals and corporations. Since the government is spending at 23% GDP but collecting only 16.5% GDP any further erosion in revenue due to tax cuts would make things worse.
Harris proposes higher taxes on the wealthy and corporations but would have difficulty passing that through Congress.
If the deficit widens, markets may finally notice that the deficit is a problem.
Trump would take action to close the southern border to immigrants, but those new arrivals have been a significant source of growth in the labor force for the U.S. A Harris presidency would take similar steps to slow immigration as this has become a top issue for voters.
The biggest policy differences between the two are likely to be on tariffs and taxation and the impact is uncertain.
Hilliard MacBeth
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