Presidential debates don't usually decide the outcome of an election, but this one between Kamala Harris and Donald Trump could be an exception. Why? Polls show the race is very close, with Trump leading Harris by a large margin, mainly due to voters' dissatisfaction with high post-COVID inflation, which has seen consumer prices rise by about 10%. 20 percent Since President Biden took office.
Clearly, Harris' ability to get voters to trust her economic policies will be key to her election victory. But this will be a tough task for two reasons. First, voters know that inflation was low during President Trump's term before spiking under Biden. Second, Harris unveils “Opportunity Economy” plan The chancellor's speech last month was widely criticised for failing to provide a convincing explanation for tackling inflation.
So how will Harris respond to these challenges? First, we need to briefly explain why inflation has spiked. My interpretation is that the trajectory of inflation over the past 15 years has been driven primarily by a series of global shocks and the policy responses to them.
After the 2008 financial crisis, inflation was contained. That was largely due to a subpar U.S. and global economic recovery under both the Obama and Trump administrations: sluggish demand and a failure to boost prices despite low interest rates in the U.S. and negative interest rates in Japan and Europe.
When unemployment spiked in 2020 due to the COVID-19 pandemic, large-scale federal programs were enacted to stabilize household incomes. The Federal Reserve's zero interest rate policy also supported demand for housing and construction. By 2021, the combination of resilient demand and global supply disruptions caused commodity prices to soar around the world.
nevertheless The Federal Reserve predicted that the inflation spike would be temporary.Russia's invasion of Ukraine in February 2022 and further waves of COVID-19 have further hurt the global economy and created new price pressures.
The Fed responded by aggressively raising interest rates. The good news is that this effort, along with easing supply chain bottlenecks and tapering fiscal stimulus, has helped to tame inflation, prompting Fed Chairman Jerome Powell to signal that the Fed will begin cutting interest rates this month.
meanwhile, Mortgage rates fell to 6.35%. That's 1.4 percentage points lower than the peak in October last year.
But Harris faces two big challenges. First, Donald Trump will likely argue that Biden's loose fiscal policies have exacerbated inflation. Harris can counter by pointing out that Trump also took a similar expansionary approach and supported extending COVID relief payments to families at the end of his presidency. In fact, Trump has approved $8.4 trillion in 10-year federal borrowing during his presidency, compared to Biden's $4.3 trillion so far. Committee for a Responsible Federal Budget.
Another challenge for Harris is that parts of her economic plan are flawed, particularly because she has accused food retailers of price gouging. The Washington Post Editorial Board “Instead of offering a substantive plan, she wasted time on populist gimmicks,” he wrote. Some have compared it to the wage and price controls implemented by the Nixon administration in 1970. It turned out to be ineffective and even harmful.
Prime Minister Harris would be wise to focus on policies that will boost competition and productivity. In this regard, she said this week: Increase federal tax incentives for startups From $5,000 to $50,000.
Harris said, Recent Agreements The Biden-Harris administration has negotiated with pharmaceutical companies to significantly reduce the costs of 10 widely used drugs. Harris' proposal to reinstate the child tax credit The bill, part of a COVID-19 relief package, is also popular with voters.
But it's unclear whether these arguments will convince voters of her economic management, and so she will likely have to question Trump's economic proposals as well.
Harris' biggest claim is that President Trump's plan to increase tariffs Imports from China will be subject to tariffs of up to 60 percent, while other imports will be subject to tariffs of up to 20 percent. It is the same size as the Smoot-Hawley Tariff Act of 1930. This led to retaliation from America's trading partners and contributed to the Great Depression.
As Harris pointed out in her Democratic National Convention speech, tariffs are effectively national sales taxes on these goods, and the burden falls hardest on low- and middle-income families.
The Peterson Institute for International Economics President Trump's latest proposal would cost middle-class families more than $2,600 a yearThat means after-tax income would fall by more than 4 percent — a net loss of 2.7 percent if you include the reduction in income taxes paid if the Tax Cuts and Jobs Act is extended.
The trade-off is even worse for the bottom 20% of Americans: Trump's tariffs would reduce their after-tax income by 6.3%, compared with just 0.5% from the Tax Cuts and Jobs Act.
Ultimately, if these estimates are valid, President Trump’s proposed tariffs and tax cuts would do more harm than good for the vast majority of American families. In fact, the only income brackets that would benefit are the top 1 percent of families.
To win, Harris needs to convince voters that they would be better off with her as president, and that means showing how her plan is effective and better than her opponent's.
Dr. Nicholas Sagen is an economic consultant and affiliated with the University of Virginia Darden School of Business. He says:“Investing in the Trump Era: How Economic Policies Affect Financial Markets”
