Economic populism set to be the winner in the US regardless of who’s the next president

First, this week brings a crucial debate between Kamala Harris and Donald Trump. The confrontation in Philadelphia on Tuesday night, 10 September 2024, will be their first – and possibly their last – debate before the November election, as no further debates have been scheduled. 

Harris, the Democratic candidate, who has gained significant popularity since her nomination, faces enormous pressure to deliver a strong performance against the natural showman Trump. Recent polls suggest her recent momentum in the race for the White House is waning. The contest is currently neck and neck.

Of greater long-term significance is that last week the candidates revealed their economic plans, neither of which makes for easy reading. Trump outlined his key proposals in a lengthy speech to a Wall Street audience on Thursday, emphasising lower taxes, reduced government spending and an aggressive deregulation strategy led by Elon Musk. Trump’s approach to controlling inflation centres on increasing US energy production – which is already at an all-time high – to lower fuel prices, despite the national average recently falling below $3.30 per gallon. He also plans to slash federal spending and extend the 2017 tax cuts, which are set to expire next year, before introducing further cuts.

As is often the case with Trump, his ideas on trade are extraordinary, and they seem to have grown more extreme during his time out of office. The cornerstone of this is a long-standing proposal to impose a 10% tariff on all imports and a 60% tariff on goods from China – both of which would significantly raise costs for all Americans, falling disproportionately on blue-collar workers. 

According to Moody’s Analytics, Trump’s proposals could lead to a recession by mid-2025, with rising unemployment and inflation, while the Peterson Institute for International Economics estimates that the average family would face an additional $1,700 in annual expenses because of these higher prices. A Republican spokesperson dismissed this as “fake news”, arguing that claims about tariffs being a tax on US consumers are “lies pushed by outsourcers and the Chinese Communist Party”. We have entered a parallel reality where Republicans now frame support for trade as communism.

Last month, Trump elaborated on an “all tariffs policy”, suggesting that import duties could entirely replace income tax. Economically, this is nonsensical. It is impossible to find a tariff rate high enough to offset the loss of tax revenue without severely disrupting trade, which would disrupt growth and thereby tariff revenue. It is the economic equivalent of that mythical snake which devours itself, starting with the tail.

Yet he only seems to be doubling down. In further threats to any country that is entertaining deeper ties with China in renminbi, the ex-president pledged on Saturday that if “you leave the dollar, you’re not doing business with the United States because we are going to put a 100% tariff on your goods”. China, India, Brazil, Russia and South Africa discussed de-dollarisation at a summit last year.

Democrats not much better

Yet if this reads like economic populism bordering on lunacy, Kamala Harris is not much better. While most of her economic policy manifesto is broadly a continuation of the inflationary, fiscally ruinous largesse of Bidenomics, her most eye-catching hobbyhorse is that grocery prices are too high. On this she has consistently advocated for price controls.

“Prices in particular for groceries are still too high. The American people know it. I know it. Which is why my agenda includes what we need to do to bring down the price of groceries. For example, dealing with an issue like price gouging.”

It is unnecessary to go into why price controls are bad policy. A comprehensive review of the damage wrought by price controls is set out in The War on Prices, edited by Ryan Bourne. The effects of a cap can be summarised as “destroying valuable price signals, creating shortages and queues, reducing quality, hindering innovation and generating inequality between those benefiting and those not”. 

Strangely, on some issues, the candidates seem oddly aligned. First is trade; while Harris might not be as blunt as Trump, there can be no doubting her protectionist bent. The vice-president said last week she opposed the planned $15-billion takeover of US Steel by Japan’s Nippon Steel, which Trump also opposes. Whoever wins the election, free trade and globalisation will lose.

Second, both candidates’ plans would increase the deficit. According to the Penn Wharton Budget Model at the University of Pennsylvania, Trump’s set of tax breaks would add $5.8-trillion to it over a decade, versus Harris’s package of Bidenomics, which would add $1.2-trillion. Neither is willing to confront the blunt reality of the nation’s parlous public finances, hoping the electorate is too dumb to notice.

And yet, regardless of the paucity of debate, the next president’s economic agenda will likely be shaped by issues outside their control. As the jobs numbers that came out last Friday showed, the US labour market is slowing. Interest rates should be cut later this month. The big question is whether the positive effects of lower borrowing costs filter through to the real economy fast enough to prevent a recession, or whether the economy has already entered a nosedive.

If that is the case then no amount of tariffs, protectionism, price controls or even tax cuts will do anything to stop the rot. Such economic populism, from Republicans or Democrats, will only hasten the decline and fall of the American empire. DM