Real Insight: Election 2024 Economic Policy Proposals

By: Brian Seay, CFA

Want to go deeper than cable news on the proposed economic policies of both presidential campaigns?

I evaluate policy proposals with history and data as the guide to discover which proposals may really create growth and reduce inflation in the economy. Neither Vice-President Harris nor Former President Trump lay out all good or all bad proposals. Whether you consider yourself a republican, democrat or independent, you might be surprised at the proposals from your party. Lastly, I will discuss what the proposals mean for investors. Watch the video, listen to the podcast version on The Capital Stewards Podcast or read the transcript below.

Transcript:

Hello and welcome to the Capital Stewards Podcast. Today I’m going to walk through the economic proposals from the democratic and republican campaigns and evaluate which ones may be good for the economy and which ones may hurt the economy. If you are looking for a cable news show level discussion – this will not be that – my intention is to show you with history and data what works and what does not work to drive growth and reduce inflation in the economy. Neither Vice-President Harris’s or Former President Trump have all good or all bad proposals. Whether you consider yourself a republican, democrat or independent, you might be surprised at the proposals from your party. In my opinion, both sets of economic proposals need work, isn’t that the beauty of compromise in our country? My hope is that this discussion will help you evaluate the proposals from the candidates, have intelligent discussions with your friends and neighbors over the next few months and use your influence to shape policy once we have a new administration in 2025. I’m going to cover inflation, taxes, the minimum wage, housing, energy and a few other topics. At the end I’ll discuss the implications for investors to make it practical as always. This one is a long one – so you can skip ahead to specific sections using the link in the show notes if you would like to do that – so buckle up for a ride and let’s dive into the economic policies of each campaign.

What caused inflation to begin with over the past 4 years?

The most important economic issue to most Americans is inflation, in fact, the election may turn on who has the better policy prescription for prices. So I think it makes sense to start there. Before we dive into potential proposals, let’s take a step back and look at what caused inflation to start with over the past few years.

Chart 1

So In Covid, we lock everyone down, which initially collapses the economy. You can see the sharp drop in activity in 2020. In addition to spending slowing down as workers lost their jobs, workers left the labor force either because they couldn’t find a job initially or they didn’t want to go into work because they were afraid of the impact of getting Covid. That caused the labor force to shrink. So spending slows and the labor force shrinks, that’s actually what naturally should happen in a recession. No one wants higher unemployment, so the government response with significant stimulus was appropriate, that’s the right time for the government to step in and spend big. The Cares act in 2020 sent $1.9 directly to households and also to businesses to help them make payroll.

As we moved into 2021, the economy started to grow again. Some workers lost jobs when businesses closed, but others continued to work and get paid. Most of the workforce remained employed, and they had their paycheck plus extra funds from the care act coming in. So the U.S. consumer did what it does best – spend.

The lock downs and extra cash created more demand for physical goods since people could not consumer services in person. The producers of athleisure attire and furniture were not able to keep up with demand because the key ingredient needed to produce more stuff – more people – were not available because they left the labor force. The result, price increased and inflation. I’m talking a lot about government spending here, but don’t discount the impact of both state and national leaders encouraging workers not to go into physical workplaces. Tell everyone they can get more sick than was really true and handing them cash not to work is a strong incentive to stay home. That created labor shortages, which drove up wages, which sounds nice, but then those increased wages were simply spent on higher prices at the store. No one was actually better off in that environment.  

If we left well enough alone, perhaps inflation would have been “transitory”. Lock downs would have ended and workers would have gone back to work.  But even as the economy was clearly recovering, the government spending didn’t stop. In 2021 The Biden administration passed the American Rescue plan, which put more money into an economy that was starting to grow again. They followed that up with the “Inflation Reduction Act” – which – regardless of your political party – objectively had nothing to do with inflation. It was simply a spending bill.

Now that inflation was clearly not simply transitory, the Fed started to raise rates in 2022. Why raise rates? Because they essentially needed to suck out the stimulus dollars that were pumped into the economy over in 2021 and 2022. Raising rates means more money goes to interest payments and it slows down M&A and job creation, quite literally un-doing the stimulus of a few month prior. Now, the Fed wasn’t perfect here, lets take a look at the Fed’s role in more detail.

Chart 2

The Fed’s balance sheet went from $4.5 Trillion to Almost $9 Trillion dollars. So a doubling of the balance sheet, which causes currency depreciation through inflation. At least $2 Trillion of that was treasury securities, likely required to fund all of the deficit spending from Washington. But the remainder was mortgage bonds and a host of other items. Part of the reason home prices exploded upward in 2021 and 2022 was that interest rates were originally kept low as the Fed bought almost all the new issuance of mortgage bonds that came to market. That kept home buying strong where perhaps it should have been slowing down.

So the cause of inflation was lock-downs that lasted too long, which created supply chain disruptions. This would have caused some inflation on its own, but the peak in core inflation would have likely been 5%, not 6.5%, and the issue would have been resolved sooner as lock downs ended. But the government then threw fuel on the fire with more spending, the caused inflation to peak closer to 6.5%. And the Fed didn’t help buy continuing to buy mortgage bonds along the way.

Price levels are now high and they will not go back to where they were pre-covid, that would cause deflation, which is a whole different economic problem, see 2007 – 2008. So What kinds of policies keep inflation reigned in around 2.5%?

The answer is letting the economy adapt more naturally to changes. Less government intervention in forced lock downs etc., less spending when the economy is not in a deep recession and lastly, the Fed can help by keeping its balance sheet stable.

So where do the campaigns stand on that? Neither party has been good at reigning in spending. The deficit has gone up under every President since Bill Clinton. Bush 43 spent more the Clinton, Obama Spent more than Bush, Trump more than Biden, Biden more than Trump. So no ones hands are really clean here. Trump’s proposals generally target the classic “waste fraud and abuse” types of cuts within the government. Other more drastic measures, like eliminating entire government departments have been proposed but did not ultimately make his 20 pt. Trump 47 plan. It is notable that while Trump has been very clear that he will not cut social security, he is not proposing an increase. The democratic policy statement, on the other hand, is proposing not simply maintaining social security, but increase payments for social security and medicare. I did an entire podcast on social security. It will be hard enough to maintain the program, In my view additional benefits that aren’t paid for by direct tax increases would be significantly inflationary. The broader set of democratic proposals, including climate change initiatives, and handouts for housing and prescription drugs would likely be inflationary. I’ll dive into taxes momentarily, but I don’t see enough tax offsets in their plans to pay for all of the proposed programing.

Taxes:

The proposals for taxes are similar to the old talking points from both sides.

The Democratic platform wants to make the tax code more “progressive” which is code for raising taxes on middle- and high-income earners and reducing taxes on low-income workers. Democrats also propose raising the estate tax and corporate income taxes. They would like to increase refundable credits to low-income households and close “loopholes”

President Trump cut taxes significantly in his first term and his most significant tax proposal is simply to make those tax cuts permenant. He also recently proposed eliminating taxes on Tips, which was then copied by Vice-President Harris, so I’ll cover that briefly in a moment.

Now that we know where both parties stand, let’s talk about what tax environment creates the best economy. Taxes, fundamentally, are a cost of doing business and a drag on spending and saving. If taxes were zero, businesses would invest more, consumers would save and spend more. That shouldn’t be a controversial statement. Intuitively, it makes sense that higher taxes are a cost for businesses and consumers. Further, the tax foundation has published an amalgamation of research that shows that lower tax rates generate some economic growth. Even the left-leaning Brookings institute shows that lower tax rates have contributed to economic growth over history. So, the impact of tax increases and decreases is not controversial, that’s why the battle isn’t between higher and lower, its between “more progressive” on the left and lower on the right.

The government does play a critical role in society and the economy and it’s in everyone’s best interest for it to function properly. In addition to running the government, most people agree that a capitalist economy needs some sort of safety net for those that are left behind by innovation or fall on hard times. So, we need taxes at some level to make the government work and to help those in need, the political debate is what is the right level and who should pay?

I’ll start with the democrats’ plan and I’ll make a couple of points on the “progressivity” of the tax code – which is just a big word for analyzing the amount of taxes paid by relatively well-off families vs the amount paid by lower income families. The U.S. tax code is currently very progressive. Anyone who says the “rich don’t pay their fair share” is simply wrong.

(Chart)

The top quintile is literally the only group that pays a higher percentage of the taxes than their share of the income. They are the only group that actually pays their “fair share” according to the math. Now, you can make a political statement that they should pay more – but then you need to define what that number is – and what “enough” is – because the wealthiest people in the U.S. already pay more than their “fair” share of the taxes.

The other popular argument is that “rich people” pay lower effective tax rates than their secretary – the famous Buffet example.

(chart)

The other point I’ll make here is about the top 1% since that gets so much air time. If I broke out the top 1% here, it wouldn’t look any different. They pay more of the taxes than their income would dictate and their tax rates are higher than the other groups in the top quintile, so there isn’t any funny business going on at the tip top of the chart.

For fun, I ran the numbers on what it would take to balance the Federal deficit and only increase taxes on the top 5% - which right now is those with income over $330,000, the effective tax rate on those income earners would have to be 69%. That means a statutory rate of probably close to 100% to allow for deductions etc. So it sounds good to say that we should solve our problems by increasing taxes on the small number of families in the top income brackets, but there simply isn’t enough money to for that to be a workable solution.

The next democratic proposal is to raise the estate tax. This is only an issue generally for families with more than $25 million because the current estate tax exemption is 13.6 million per individual. So until you are close to the 25 million mark, you aren’t really in danger of owing estate taxes. The estate tax is really a political issue, it funds less than 1% of the federal budget, so its doesn’t impact the economy very much. Because the top rate is so high (40%), families that may be subject to the estate tax do extensive financial planning to avoid it –  and increasing the tax rate or making more families subject to it by lowering the exemption simple encourages more planning to reduce estate taxes. So I’m not sure the juice is worth the squeeze here for the government – but if you feel like money should be taxed when earned as income and then again when someone dies with too much – then you can support an increase in the estate tax.

The corporate income tax has much bigger implications for the economy. The current top tax rate for companies is 21%, the Democrats propose letting the Trump tax cuts expire and raising the rate back to 35%. Even more so than individuals, companies view taxes as a cost of doing business. So raising taxes by 14% will likely cause prices to go up and investment spending in things that create new jobs to go down. Companies don’t just say “woes me” and earn less money year over year, they adapt to the tax regime from the government. That’s what corporate leaders are paid to do. The CBO projects that corporate taxes will bring in $525 Billion in Revenue in 2024. A full 14% tax rate hike in taxes is actually a 66% tax increase in percentage terms, so that would pull an additional $350 billion dollars out of the economy and direct it to the government. Its easy to think of companies as rich folks off in ivory towers, but remember the ultimate owners of the largest corporations in America are everyday Americans with 401k plans, pensions, our clients  etc. So that’s $350 Billion that won’t be paid out in dividends or buybacks to shareholders or reinvested to hire more people or develop new technology that drives more growth. It will be spent by the government.

I’ll close on the democratic proposals on “tax-loopholes.” Loopholes aren’t people cheating on their taxes. Especially the top income earners in the U.S. who typically have their taxes done by very good CPA firms that aren’t interested in losing their license to practice. Loopholes are just carve outs that were baked into the tax code at some point to incentivize a specific behavior.  So anytime someone talks about “closing a loophole” – pay attention to what they are proposing and what behavior would change when they change the tax code. Usually, closing loopholes is just a fancy way to say raising taxes. Democrats have generally targeted changes that Trump created in the 2016 Tax Cut and Job Act. Those include opportunity zones, which provides tax breaks for investing in low income areas. So eliminating that means less investment in low income areas. The qualified small business income deduction, which reduces taxes for small business owners. So the impact would be less income and investment from small businesses across the country. And lastly bonus depreciation, which allows companies to get tax deductions for expenses immediately vs. depreciating them over time and getting the deduction over many years. The impact of a change here would be to reduce investments in large capital goods at companies, less M&A, probably less growth. The carried interest loophole is always everyone’s favorite. Here is one I personally think makes no sense. Carried interest is simply the bonus equity fund managers receive for their work. They are not putting capital at risk and should not receive a preferential tax rate on their income. Incentive fees in the industry would still exist because asset allocators, like us, still want to incentivize managers to outperform. Simplifying the tax code makes sense, so if so called loopholes are eliminated in favor of lower rates across the board, that is good policy that makes sense. But usually, eliminating loopholes is just raising taxes and eliminating some sort of incentive structure that was put in place in prior legislation.

Lastly on the democratic side of the ticket, there have been various proposals for wealth taxes and taxing unrealized capital gains. The latter of which is counterproductive because the government would have to assume they would need to return some portion of the money when asset prices went down in the future. So they would need to hold that money in some kind of earmarked government account. That means the total net revenue to the government would be the same as taxing capital gains when they are realized. Forcing people to make payments on unrealized gains would have all sorts of undesirable consequences like driving up market volatility, reducing funding to small businesses, and increasing leverage as investors borrow to pay taxes on things they can’t sell. Seems like a lot of downside for the same amount of money the government receives today. I also think taxing unrealized gains is very close to a wealth tax, which is very clearly unconstitutional, so I’m not sure legislation would be implemented even if it passed.

Now lets look at the republican side of the tax proposals.

Trump’s primary tax strategy is to keep his 2016 Tax cuts in place, that results in lower taxes for both individuals and corporations as compared to the Harris plan. He has recently floated the idea of reducing the corporate rate further, down to 15% from 21%. Corporations are subject to “double taxation.” What we mean by that is that the company pays taxes on its earnings and then distributions in the form of dividends and stock sales are taxed again, albeit at lower rates. All in, lower is better, especially if it leads to a simpler tax code.

Anytime we talk about tax cuts, the counter argument is well what about the budget deficit and lost revenue? How do we pay for the government? I’ve discussed this before, but the government does not have a revenue problem it has a spending problem. Tax revenues over time have been very consistent as a share of GDP. The debt has surged as spending has surged relative to the size of the U.S. economy. The top statutory tax rates for individuals and corporations has fallen dramatically over the years and revenue relative to GDP has remained constant. This is at least partially due to the Laffer curve, which is an economic theory that suggests that lower tax rates spur economic growth, which actually increases government revenue. The U.S. has budgetary issues, which are mostly related to Social Security and Medicare. I discussed those issues more fully in an episode earlier this summer. Neither campaign has proposed a fix to those structural spending issues. So no credit to either candidate for being fiscally responsible there.

Trump recently proposed a “no tax on tips” policy. It’s kinda funny that everyone supports no taxes on tips, but private equity managers should definitely pay higher rates on their “tips,” which are the carried interest performance fees they earn in their fund. This is another policy that sounds good but is difficult to implement. What happens when workers in industries that don’t typically have a tipping policy start reducing their upfront prices and expecting clients to tip. We could change zero for financial planning and then simply ask clients for customary “tips.” If that become the norm across the industry, folks would pay the tips, just like they do at restaurants. For what its worth, Kamala Harris seems to have copycatted this policy proposal. Both Harris and Trump are wrong on this one and I doubt it would actually get implemented.

When we look at the tax plans in whole, It’s fairly easy to see that The Trump plan to extend low rates, and potentially further reduce taxes should produce a better economic outcome than one that is focused on raising rates on various groups.

Tarriffs:

Tariffs have been used by both parties over the course of history and they generally create more harm than good. The latest round of Tariffs were implemented by President Trump in 2018 on imports from China. Surprisingly, President Biden left them in place at the beginning of his administration, so now everyone owns tariffs. The intention behind tariffs or import quotas sounds good at campaign rallies. We impose a tariff and more products will be made in the USA, more jobs will be created and wages will go up, all good right? The problem is that companies don’t simply say – well shucks – we will just have to pay more to import our stuff or make it here and choose to make less money. They either simply pass the tariff on to consumers in the form of a price increase or they do make good closer to home, but at a higher price. So the tariffs simply act like a tax on consumers. Prices go up to buy the same products. The resulting higher wages are simply spent at the store on the same basket of goods as prices go up. It is true that one job might be saved in a community, but the cost of that job is borne by consumers across the country in the form of higher prices.

If we look at a recent example, you can see the results of bad trade policy clearly. In 2016, a tariff was put in place to limit the importation Washers to protect Whirlpool and other domestic producers from Samsung and LG in South Korea. Imports did go down as a result of the tariffs. Further, in this case, the foreign producers just built factories in America. Whirlpool was still in trouble because now their competitors could produce lower cost machines in the U.S. Whirlpool did hire 200 more people and the foreign companies hired 1,600 Americans. Sounds great right? 1800 new jobs. The problem is that the price increases that resulted from the Terrif cost consumers $1.5 Billion in the first year alone. That’s more than $800,000 per job, and they certainly didn’t pay that at a washing machine factory. So consumers across the U.S. paid the price for the new jobs – and a price that was terribly inefficient for the economy.   And, by the way, the U.S. washing machine industry is still uncompetitive with its foreign peers.

The last round of Tarriffs in the Trump administration costs consumers an average $625 a year according to the Tax foundation. The economy was humming along and goods costs were broadly declining, but that doesn’t remove the fact that prices went up on the items included in the Tarriff. It would be harder to hide the impact of a broader tariff approach in a weaker economy.

The standard of living, for the rich and poor, goes up over time as goods and services become cheaper to produce. We want to produce goods at the lowest price possible so that the most people can benefit from a product. That means making stuff at the lowest cost possible. That’s what competition does in a capitalist economy. That competition might mean some production moves overseas and some jobs are eliminated. However, the economy creates new jobs that require more skill and pay more over time. That process is what drives up the standard of living – and that process has made the standard of living in the U.S. the best in the world by far.

Tariffs can be useful in limited sectors for economic security and national defense purposes. Occasionally, foreign governments, including China, will spend government money to sponsor the production of goods at a price below the real market price to

U.S. producers out of business. In those cases, Tariffs can be useful to even the playing field. There are also great reasons to ensure domestic production for highly advanced technology with military applications. But foreign government sponsored production and military technology is fairly limited in scope and in those cases the trade-offs are still negative for the economy, but sometimes geopolitical positioning outweighs the economic concerns.

Trumps proposal to add tariffs on all imported goods, or even all goods imported from a country like China, is bad policy that will hurt you as a consumer in the U.S. It will drive up the cost of everything you buy. Its not helpful for the U.S. economy, even thought it might sound good in an election.

Raising the minimum wage.

The democratic platform proposes raising the minimum wage to $15 by 2026. That would effectively double the minimum wage in many states and do so fairly quickly. Let me be unequivilically clear, raising the minimum wage reduces the number of available jobs. Period. It’s not an opinion, ask any business owner and they will tell you that, and so will a fair read of the economic research literature. There are lots of economic papers that suggest that a substantial number of workers would see hourly wage increases in a $15 minimum wage environment. That’s true. Roughly 1/5 of American households make less than $30,000 each year. $30,000 is about the income level that $15 per hour would create on an annual basis. The problem is that over time, companies will replace higher cost workers with technology. As the price of employing a person increases, it becomes easier to trade off that person with a machine. We don’t have to go back in ancient history to see that occur. Harvard Business Review did a study in 2021 of workers in California grocery stores as minimum wages rose each year in the early 2010s. While the hourly wage went up, the total number of hours went down. More workers were employed, meaning fewer worked enough hours to receive benefits. Total pay to workers declined over the period despite the increase in the hourly wage rate. Recently, California increased the minimum wage on restaurant employees in 2024. In just a couple of months, 89% of restaurants have reduced hours and 70% have reduced the number of employees. I’m not shocked, its almost as if the results were in the Harvard study from several years ago. Oh, and, food operators raised prices on everyone, including their low income customers and most big chains said they would reduce future store openings in the state.

A better approach is to educate workers, help the acquire skills so that they can move on from lower paying jobs into higher paying ones. That’s how America is supposed to work. The minimum wage, by the way, should go up over time, but that increase should be tied to inflation, not an arbitrary one-time increase.

Housing Grants:

Housing affordability is a problem in the U.S. The U.S. housing market is underbilt because new home building crashed during the 2007-2008 financial crisis and never recovered. Because homebuilding became harder, builders also switched to products with higher margins over the last decade, mainly more expensive trade-up and luxury homes. That further exacerbated the shortage at the entry level price point. Additionally, the millennial generation has been coming of age and increasing single family home demand while production is depressed. All of that creates a cocktail for unaffordable home prices.  I’ve discussed this from an economic and investment perspective many times as part of the case to own real estate.

Vice - President Harris has talked about grants for home buyers in speeches, the democratic party platform outlines an immediately refundable tax credit for $15,000 for first time home buyers. Regardless of the exact amount or whether its based on generational home ownership or not, this is the wrong way to solve the housing problem. Simple handing out money to buy a specific item in a market that is capacity constrained drives up prices and does nothing to broaden home ownership. Home builders would probably happily take the check as they increase prices due to higher levels of demand. We saw the same thing happen during COVID. The government sent checks out and hard goods production was capacity constrained, leading to inflation in 2021 and 2022.

The right way to tackle home affordability is to incentivize home building. That will increase supply, promote competition and drive down prices. It may not be “popular” to give tax cuts to developers or government subsidized loans to developers, but policies designed to encourage builders to build more homes would be more effective than handouts. President Harris recently proposed tax incentives for developing low-cost housing, so perhaps the political class is moving in the right direction on this one. That policy would make a lot of sense. On the other side of the isle, one Trump proposal is to open federal land for building. I’m not sure if there is enough federal land near urban centers for this to make a difference, but selling land to developers at a reduced price in exchange for limitations on the prices for units built would likely be an effective policy as well.

Infrastructure

One good proposal from both sides. Lots of infrastructure like highways, tunnels, airports, the energy grid etc. benefit from Federal sponsorship and working together across state lines. Infrastructure investments generally lead to positive economic returns over time, but require immense capital upfront, making them idea expenditures for the federal government.  

Energy

One thing I didn’t spend a lot of time on is energy. We could spend a whole podcast there. The overarching thing to remember is that energy – and gas prices – are a global market. So, yes it is good to produce more energy of all kinds in the U.S. – no amount of production fully insulates the U.S. from what’s happening in global energy markets. U.S. oil production has sky-rocketed since 2000, yet gas prices are up as well. So yes, to more U.S. production and letting the economy sort out clean energy vs. government mandates, but the production equation doesn’t make much of an impact on the economy in the short run.

In conclusion, we’ve covered a ton of ground. I hope you found this conversation help and informative as you form your own views about the election and have discussions with your neighbors.

The race is very close – the national polling is basically dead even, Trump has a slight advantage in the electoral college currently due to slight advantages – generally less than 1 pt – in the swing states. All of that is statistically insignificant so the race is really anyone’s game to win or lose.

As I’ve mentioned before, an election night result one way or the other isn’t a reason alone to buy or sell stocks or any other asset in a portfolio. But the market does respond to elections over time, particularly within sectors. Based on the current set of policies, I would expect traditional moves in assets. IF the republicans win big, oil companies and banks likely benefit. If the democrats win, clean energy likely wins. A trump win probably benefits large US capital goods companies that stand to benefit from tariffs. More than sectors, I think with the capital gains proposals on the table, you would likely see some selling at the end of 2024 and 2025 as investors sell prior to higher capital gains tax rates. But, As I mentioned, I see most of that as movements at the margins. Neither election result will matter more than the overall economic situation of the country, which is currently a slow growth economy, perhaps teetering on a recession, but not in a recession currently.

We will talk more in the fall if the policy positions evolve materially and when we have a result, we will discuss the implications for investors.