Trump or Clinton? How the Election Will Impact the Economy



Behind the circus atmosphere of this year’s election stand two competing sets of economic proposals that would have very different — and serious — effects on the nation and the world.

The Republican nominee, Donald J. Trump, has proposed major tax cuts that observers say would incentivize work, but force hard choices of deep cuts in government spending or a ballooning deficit.

He has floated the idea of imposing steep tariffs on goods from China and Mexico, and proposed major limits to immigration.

The Democratic nominee, Hillary Clinton, goes in the other direction, proposing raising revenue largely through taxing the very wealthy, and offering an array of tax relief proposals for the middle class.

The candidates will compete for the hearts and minds of an electorate that has seen an economy that has recovered from the Great Recession, but has been transformed in structure, from old-style manufacturing to high-tech industry and services. Some have been left behind along the way, namely the factory workers of the Rust Belt, where Trump has found support.

Economic growth during the Obama years has been slow, in stark contrast to the momentum and heights of the 1990s and the years leading up to the recession. Nevertheless, job growth in recent months has been good, and the unemployment rate stands at an impressive 4.9%.

The engine of economic growth in recent years has been the American consumer, says Wharton management professor Mauro Guillen, who is also director of The Lauder Institute.

“Right now, we have an economic problem in the U.S. We are a consumer-driven economy, but the middle class is suffering,” he said.

Talk on Taxes

Clinton’s plan is aimed at delivering relief to those middle-class voters, with proposals like helping people afford child care, making college more affordable and making it easier to deal with the burden of college debt. She has proposed raising the minimum wage from $7.25 to $12 an hour, and making health care more affordable. (Trump this summer proposed a $10-an-hour minimum wage, and making child care expenses tax-deductible).

Clinton has proposed a $275 billion investment in infrastructure and the accompanying jobs.

She has outlined how she would pay for these programs, supporting the “Buffett Rule,” named after Warren Buffett’s contention that millionaires and billionaires shouldn’t pay a smaller percentage of their income in taxes than middle-class households. She would require Americans who make more than $1 million pay at least 30% of their income in taxes. Americans making more than $5 million a year would see a 4% surcharge.

And Clinton has proposed closing the “carried interest” tax loophole that allows private equity fund managers to pay a lower tax rate on their earnings, by executive order if necessary.

The Tax Policy Center has estimated that the top 1% of U.S. households – those making $730,000 per year and above — would see at least $78,000 more per year in taxes under Clinton’s plan.

Jennifer Blouin, a Wharton accounting professor, says Clinton’s plan “seems more fiscally sound” than Trump’s, but that Clinton “is going to have a heck of a time getting any of these changes through a Republican Congress.”

Trump has outlined plans to adjust tax brackets. Currently, a married couple making $485,450 and over would be taxed by the federal government at 39.6%, according to the Tax Policy Center. Trump would cut this top rate to 33%, according to his August 8 economic speech in Detroit. That’s a change from his previous stance of 25%.

The corporate tax rate is currently 35%. Trump would shrink it to 15%. He would eliminate the opportunity to defer taxes on profits made overseas.

The Tax Policy Center said last winter that under Trump’s plan, everyone would see their taxes cut, but the top 0.1% would see a cut of $1.3 million per year. The Center also said Trump’s tax plan would reduce federal revenues by $9.5 trillion over the first decade alone. That’s expected to increase by less under his revised plan, though it’s unclear by how much.

“The plan would improve incentives to work, save and invest,” the Center reported. “However, unless it is accompanied by very large spending cuts, it could increase the national debt by nearly 80% of gross domestic product by 2036, offsetting some or all of the incentive effects of the tax cuts.”

A Republican Congress would be happy to pass Trump’s tax plan, but it would mean such a large budget deficit that it would need to be scaled down significantly, says Joao Gomes, professor of finance at Wharton.

Although simplifying the tax code is a great idea, and is likely to add to economic growth, the main purpose of Trump’s proposal is to reduce the size of various government programs, Gomes notes. Clinton’s plan, meanwhile, is about finding extra income to pay for an expansion of government programs, says Gomes, who called Clinton’s plans far less ambitious than Trump’s.

Guillen notes that President Ronald Reagan proposed spending cuts along with his tax breaks, whereas Trump has said the details of his spending cuts will come later, he says.

“For a candidate for the presidency to propose tax breaks and to not say where he would cut spending, is not a serious proposal,” Guillen says.

In a recent interview on the K@W show on Wharton Business Radio on SiriusXM Channel 111, Mark Zandi of Moody’s Analytics noted that Trump “wants to … cut taxes, actually quite massively, so about a trillion dollars in tax cuts each and every year. And most of that goes to very high-income households. And he’s not clear about how he’s going to pay for that.”

Currently, the estate tax affects estates worth more than $5.45 million, or $10.9 million for married couples. Clinton would reduce that threshold to $3.5 million and $7 million. Trump, meanwhile, would eliminate the tax entirely.

Eliminating the estate tax would only help the wealthiest Americans, Guillen says. “There has to be some taxation of intergenerational wealth transfer,” he notes. “Otherwise, we’d get back to the situation where the rich always get richer, from one generation to the next.”

Tariffs and Trade

Trump’s America-first, hard-line approach to trade deals has been well documented, while Clinton has been critical of the North American Free Trade Agreement that her husband, Bill Clinton, signed into law more than 20 years ago. Both candidates have said they oppose the Trans-Pacific Partnership trade proposal.

But Guillen says free trade has been good for the American consumer. It’s reduced the cost of everything we buy, and improved the variety and quality of goods and services, he notes.

Free trade has benefitted people who have certain skills, while hurting those with other skills, Guillen says. It’s been particularly bad for people in the Rust Belt states, especially those in their 40s or 50s, who would have a hard time simply retiring, he adds. But that’s a relatively small slice of the workforce, he notes.

“It’s better to lock in the gains, and try to come up with programs to help those affected find new jobs,” Guillen said.

Zandi says the tariffs Trump is proposing would “be very difficult to digest” because they would mean higher prices, and it’s not clear that production would shift to the United States.

Trump’s stance on immigration has been a big part focus of campaign media coverage, namely his pledge to build a wall on the border with Mexico, and to make that country pay for it. Guillen calls his proposals “very extreme,” noting that net migration from Mexico has come down to zero; most immigration has been from Central America, he says. NAFTA has helped make Mexico a stronger economy that has reduced illegal immigration into this country, he notes.

Zandi says passing immigration reform like what passed the Senate in 2013, and which Clinton supports, could have an energizing effect on the economy, increasing growth, expanding the tax base and helping pay for underfunded entitlement programs.

Health Care

Clinton has proposed patching up some elements of Obamacare, by adding more generous coverage for prescription drugs and capping prescription drug spending, says Wharton health care management professor Mark Pauly. She’s also embraced the “public option,” as well as buying into Medicare at age 55, in response to the challenge from Bernie Sanders, he notes.

Trump proposed to abolish Obamacare and replace it with a high-deductible health insurance plan with health savings accounts, says Pauly. Americans could fully deduct their premiums from their taxes, Pauly says. For lower-income Americans, states would be given a block grant of Medicaid, and state officials would be able to choose how to use it.

The plan is ironic, because even though the regulatory burden would disappear, as well as the individual and employer mandate, the remaining plan would still look a lot like Obamacare, Pauly says.

Historically, health care has been Clinton’s issue, but she gave it only a sentence in her acceptance speech at the Democratic convention, Pauly says. Both candidates have been avoiding speaking on this topic, because they know there isn’t much to be gained by doing so, he notes.

“There’s no winning strategy, there’s only alternate ways to make people mad,” Pauly adds.

Italy, Germany and France Meet on an Aircraft Carrier

The EU leaders tried to project unity, despite Italy’s economic malaise.

By George Friedman

German Chancellor Angela Merkel, French President François Hollande and Italian Prime Minister Matteo Renzi met yesterday on the Italian aircraft carrier Giuseppe Garibaldi. The announced purpose was to discuss European policy after Brexit. The real discussion was about Italy’s economy and the steps needed to revive it after a long period of stagnation, which continued through last quarter.

Italian Prime Minister Matteo Renzi, flanked by German Chancellor Angela Merkel (R) and French President Francois Hollande (L), gestures as he delivers a speech on Aug. 22, 2016 during a joint press conference held aboard the Garibaldi aircraft carrier on the harbor of the Italian island Ventotene. VINCENZO PINTO/AFP/Getty Images

Before getting to the economic discussion, it is interesting that they chose to have the meeting on an Italian aircraft carrier – a more military location than Europeans normally prefer. The choice is even more interesting after a leak to German media suggested that Germany is considering resuming the military draft. The United States, and not only Donald Trump, has been increasingly critical of Europeans’ contribution to NATO. The European Union’s GDP is larger than that of the United States, but their collective contribution to their own defense is a fraction of the United States’. In addition, the limited capabilities of Europe’s militaries make the Europeans dependent on the Americans, so nations with significant security issues must accommodate the U.S., reducing Europe’s coherence.

Holding the meeting on the Garibaldi drove home the point that Europe has some defense capability. But it also underscores how without Britain, the EU’s military power is diminished, if only on paper, since the EU does not have a united defense capability outside of NATO. It was a good place to have a meeting at a time when European unity is in question, with Italy as a weak link.

Italy’s economy is weak. There is no growth. The banking system is in bad shape. Unemployment is high. There is substantial public unrest, and Renzi’s standing is weakening. Italy has been living somewhere between recession and stagnation since 2008, and after eight years, there is no sign that the situation is going to end.

The Italians want to run a substantial budget deficit to stimulate the economy. The EU operates under a “stability pact,” which requires deficits to be kept within certain limits, but allows for exceptions. One exception has been France, which has been operating outside the boundaries of the stability pact for years. Spain and Portugal were recently given exceptions as well. As Merkel put it, “The stability pact has a lot of flexibility, which we have to apply in a smart way.”

I am not sure what “a smart way” looks like, but the issue does not apply to Italy. Renzi said, “Italy’s deficit has been at the lowest level of the last ten years.” He said that he “would go ahead with structural reforms and deficit reductions for the good of [Italy’s] children and grandchildren.” In other words, Renzi said that he would further tighten spending. Merkel called his stance “courageous.” Hollande mentioned that the U.K.’s decision to leave the EU at some point in the future “requires a response by EU leaders.” Merkel agreed that they need to “deliver results.” She was not clear on what those results would be.

It is difficult to understand Renzi’s move. Increased austerity has not worked in eight years. Accepting that Renzi is not insane, it is difficult to understand why he thinks this move will work any time soon. Merkel conceded that these actions “won’t show results in four weeks, but it sets the parameters for a sustainable and successful Italy.” No one expects it to work in four weeks, but the question is why it should work at all.

Two things emerge from this. One is that the Germans and French are going to use the Brexit that has not happened as an explanation of why increased austerity is needed. It is not clear to me how Brexit leads to austerity, but Merkel seemed to be saying that. Second, Merkel let it be known that while it is not up to Germany, the European Commission might be more flexible to accommodate Renzi. That is obviously an option, given the way France, Spain and Portugal have been treated.

But given the strategy Renzi is proposing, there is hardly a need for the commission to be accommodating. Renzi, who was seen as a maverick in Europe, is now being more austere than is required. If Merkel is congratulating you, then she has gotten everything she wants.

Part of this might be political gamesmanship. Renzi needs a victory. One way to get it is to propose deep austerity and then demand concessions from the EU Commission. Once granted, he can be hailed as a tough negotiator. The problem is that he would be bargaining against his own budget. But politics is strange enough that he might pull it off. An alternative is that he knows he will need EU help on Italy’s banks and by conceding this point, he is setting up an EU concession on the banks. That is pure guesswork, as there wasn’t a hint of it in the talks.

In either case, the budget, mandated as it is by the EU, will be extremely unpopular, imposing several more years of austerity. Inevitably, it will generate an exit movement, with proponents arguing that the only reason Italy has these problems is an EU-imposed austerity, and that the faster they get out of the EU the better. For all I know, maverick Renzi lives, and he is doing this to trigger this movement. But whether or not he favors leaving the EU, there will be a movement as a result of this budget.

The argument for staying in the EU will be that Italy can’t get better without the EU. The argument for leaving the union will be that Italy will never get better if it stays. In any case, the malaise that has gripped Italy for years will continue, and it is important not to expect solutions in four weeks. The problem Merkel has with European unity is that after eight years, no one expects an improvement in four weeks. The question is whether this is the permanent condition of Europe. Perhaps this is the best Italy will do for a long time, including children and grandchildren.

The scene on board the Garibaldi was designed to remind everyone that Europe is not without military power and to legitimize European unity in the face of Britain’s decision to leave. But it is not clear whether the Italian public will applaud or demand that the Garibaldi be sold. It isn’t clear that Italy will choose to leave by any means. But it is clear that the Italian economic crisis, of which the banks are simply a symptom, is not on its way to clearing up.

Reform or Divorce in Europe

Joseph E. Stiglitz

Newsart for Reform or Divorce in Europe

NEW YORK – To say that the eurozone has not been performing well since the 2008 crisis is an understatement. Its member countries have done more poorly than the European Union countries outside the eurozone, and much more poorly than the United States, which was the epicenter of the crisis.
The worst-performing eurozone countries are mired in depression or deep recession; their condition – think of Greece – is worse in many ways than what economies suffered during the Great Depression of the 1930s. The best-performing eurozone members, such as Germany, look good, but only in comparison; and their growth model is partly based on beggar-thy-neighbor policies, whereby success comes at the expense of erstwhile “partners.”
Four types of explanation have been advanced to explain this state of affairs. Germany likes to blame the victim, pointing to Greece’s profligacy and the debt and deficits elsewhere. But this puts the cart before the horse: Spain and Ireland had surpluses and low debt-to-GDP ratios before the euro crisis. So the crisis caused the deficits and debts, not the other way around.
Deficit fetishism is, no doubt, part of Europe’s problems. Finland, too, has been having trouble adjusting to the multiple shocks it has confronted, with GDP in 2015 some 5.5% below its 2008 peak.
Other “blame the victim” critics cite the welfare state and excessive labor-market protections as the cause of the eurozone’s malaise. Yet some of Europe’s best-performing countries, such as Sweden and Norway, have the strongest welfare states and labor-market protections.
Many of the countries now performing poorly were doing very well – above the European average – before the euro was introduced. Their decline did not result from some sudden change in their labor laws, or from an epidemic of laziness in the crisis countries. What changed was the currency arrangement.
The second type of explanation amounts to a wish that Europe had better leaders, men and women who understood economics better and implemented better policies. Flawed policies – not just austerity, but also misguided so-called structural reforms, which widened inequality and thus further weakened overall demand and potential growth – have undoubtedly made matters worse.
But the eurozone was a political arrangement, in which it was inevitable that Germany’s voice would be loud. Anyone who has dealt with German policymakers over the past third of a century should have known in advance the likely result. Most important, given the available tools, not even the most brilliant economic czar could have made the eurozone prosper.
The third set of reasons for the eurozone’s poor performance is a broader right-wing critique of the EU, centered on eurocrats’ penchant for stifling, innovation-inhibiting regulations. This critique, too, misses the mark. The eurocrats, like labor laws or the welfare state, didn’t suddenly change in 1999, with the creation of the fixed exchange-rate system, or in 2008, with the beginning of the crisis. More fundamentally, what matters is the standard of living, the quality of life. Anyone who denies how much better off we in the West are with our stiflingly clean air and water should visit Beijing.
That leaves the fourth explanation: the euro is more to blame than the policies and structures of individual countries. The euro was flawed at birth. Even the best policymakers the world has ever seen could not have made it work. The eurozone’s structure imposed the kind of rigidity associated with the gold standard. The single currency took away its members’ most important mechanism for adjustment – the exchange rate – and the eurozone circumscribed monetary and fiscal policy.
In response to asymmetric shocks and divergences in productivity, there would have to be adjustments in the real (inflation-adjusted) exchange rate, meaning that prices in the eurozone periphery would have to fall relative to Germany and northern Europe. But, with Germany adamant about inflation – its prices have been stagnant – the adjustment could be accomplished only through wrenching deflation elsewhere. Typically, this meant painful unemployment and weakening unions; the eurozone’s poorest countries, and especially the workers within them, bore the brunt of the adjustment burden. So the plan to spur convergence among eurozone countries failed miserably, with disparities between and within countries growing.
This system cannot and will not work in the long run: democratic politics ensures its failure. Only by changing the eurozone’s rules and institutions can the euro be made to work. This will require seven changes:
· abandoning the convergence criteria, which require deficits to be less than 3% of GDP;
· replacing austerity with a growth strategy, supported by a solidarity fund for stabilization;
· dismantling a crisis-prone system whereby countries must borrow in a currency not under their control, and relying instead on Eurobonds or some similar mechanism;
· better burden-sharing during adjustment, with countries running current -account surpluses committing to raise wages and increase fiscal spending, thereby ensuring that their prices increase faster than those in the countries with current-account deficits;
· changing the mandate of the European Central Bank, which focuses only on inflation, unlike the US Federal Reserve, which takes into account employment, growth, and stability as well;
· establishing common deposit insurance, which would prevent money from fleeing poorly performing countries, and other elements of a “banking union”;
· and encouraging, rather than forbidding, industrial policies designed to ensure that the eurozone’s laggards can catch up with its leaders.
From an economic perspective, these changes are small; but today’s eurozone leadership may lack the political will to carry them out. That doesn’t change the basic fact that the current halfway house is untenable. A system intended to promote prosperity and further integration has been having just the opposite effect. An amicable divorce would be better than the current stalemate.
Of course, every divorce is costly; but muddling through would be even more costly. As we’ve already seen this summer in the United Kingdom, if European leaders can’t or won’t make the hard decisions, European voters will make the decisions for them – and the leaders may not be happy with the results.

Russia's Illusion of Influence in the Middle East

Moscow’s position in the region is not as dominant as it might seem.

By Kamran Bokhari

Over the past several months, media reports have made it seem like Russia’s influence is growing in the Middle East. After all, Russian air support helped Syrian President Bashar al-Assad’s regime regain the upper hand against the rebels in Syria. Then, Turkey suddenly and intensely moved to improve ties with Russia – at a time when Turkish-American relations have deteriorated. Finally, and most recently, Russian strategic bombers conducted airstrikes in Syria after taking off from an Iranian air base.

Today, however, the serious geopolitical constraints that Russia faces in expanding its influence in the Middle East became quite apparent. The Kremlin’s Foreign Ministry spokeswoman said that Russia and Turkey remained at odds over Syria. Turkish Justice Minister Bekir Bozdağ said that anyone who accuses Turkey of aiding the Islamic State – which Moscow has done quite loudly – is an enemy. Elsewhere, within days of allowing Russian aircraft to take off from one of its bases, Iran rescinded the permission. Defense Minister Hossein Dehghan accused Russia of a “betrayal of trust” for publicizing the deal. These different but definitive signs underscore how uncomfortable Turkey and Iran are with getting too close to Russia.

Russian-Iranian Relations

Russia and Iran are on the same side as far as Syria is concerned. They are the principal allies of the Syrian regime and cooperate closely to ensure that Assad remains in power. Tehran and Moscow also have very close bilateral relations in a number of fields. Russia has helped Iran on the international front with regards to the latter’s controversial nuclear program.

That said, there is a huge debate within Iran on trusting Russia. Here we are not talking about the reformists versus hardliners. The mistrust runs deep within Tehran’s conservative establishment. Just the other day, Heshmatollah Falahatpisheh, a ranking hardline member of the powerful parliamentary committee on national security and foreign policy, warned that, in recent years, Russia had demonstrated “a different and volatile foreign policy.”

Criticizing the decision to allow Russian aircraft to use the Shahid Nojeh air base, the lawmaker remarked that whenever Iran was faced with a crisis, Russia had sided against it.

The Iranians are well aware that Russia views Iran as a bargaining chip for extracting concessions from the Americans. Indeed, Russia supported the most recent wave of U.S.-led crippling sanctions against Iran in 2012 and for many years delayed the supply of the S-300 missile system to Tehran.

Iran’s problem with Russia really goes back centuries. The Russians and Persians fought a number of wars between the 17th and 19th centuries. In addition, in 1941, the Soviet Union (in coordination with Britain) invaded and occupied Iran. Even after the end of World War II, the Soviets supported the creation of the short-lived Kurdish and Azeri republics carved out of territory in Iran’s northwest. Contemporary Iran is well known for its hostile relations with the United States, but its relations with Russia have also been quite troublesome – though it is far less apparent.

Russian-Turkish Ties

Ever since the outbreak of civil war in Syria in 2011, Turkey and Russia have found themselves increasingly at odds. Turkey has been trying to oust Assad and is a principal supporter of the various rebel groups fighting the Russian-backed Syrian regime. Tensions remain contained until last year for many reasons – chief among them the fact that Turkey depends on Russia for more than half its natural gas needs. But when Russia began conducting airstrikes against the Turkish-backed rebels, Turkey shot down a Russian warplane last November.

Though they managed to avoid open conflict, Turkish-Russian relations were extremely hostile for the next six months. In June, the two sides cleared the air, with Turkish President Recep Tayyip Erdoğan offering a written apology for the downed plane to Russian President Vladimir Putin. Turkey needed to improve ties with Russia because its relationship with the U.S. had soured over differences on how to deal with Syria, and especially the threat from the Islamic State.

Then came the Turkey's July 15 coup attempt, which Turkey accused the United States of being involved in given that the founder of the Gülen movement is based in Pennsylvania. At the same time, Russia was the first nation to issue a statement of support to Erdoğan after the coup, and it appeared that the die was cast for a realignment of Turkish foreign policy.

Indeed, there has been massive anti-American rhetoric in the past six weeks along with the warming of ties with the Russians. Erdoğan even met with Putin in St. Petersburg. But those were all atmospherics, because in the end Turkey, like Iran, cannot rely on Russia. Today’s developments have only made apparent what was the case all along. If Iran, which has had a close working relationship Russia, cannot fully trust the Kremlin, Turkey has many more reasons not to. Turkish and Russian interests have historically collided in the Black Sea region, where the two have fought wars and territories have exchanged hands. Even today, Turkish and Russian proxies are at war.

More important, Turkey needs the United States, which is why we see Ankara backpedaling on the demand for Fethullah Gülen’s extradition. Turkish Foreign Minister Mevlüt Çavuşoğlu today denied that Ankara ever accused Washington of being involved in the coup. Turkish media is arguing how getting a hold of Gülen is not worth the trouble. The Turks know that they can better pursue their interests by working with the United States than by flirting with Russia.

Conversely, Turkey cannot afford to simply rely on the United States. Ankara reached out to Moscow in part because of the need to balance the U.S. But the Turks swung too far away from the United States and now are repositioning. The miscalculation is to be expected in a country that is dealing with the fallout of an attempted coup. In the end, while Turkey will not get too close to the Russians, it will also keep its distance from the Americans.

These developments show how the Russians are at best a secondary player in the Middle East.

Thus, moving forward, it will be more important to watch what the real regional powers, Turkey and Iran, do to come to terms with each other and the future of the Middle East.