From an economic perspective, the last eight years have been rather ambiguous. Although the U.S. economy has been growing overall since 2009, GDP growth has not had sustained movement above 3%, the level which historically represented the long-run growth rate. Unemployment has declined from its recession peak amid moderate job growth; however, there are many signs that the economy has not yet returned to full employment, despite an economic recovery that has lasted a longer-than-average duration of seven years.
A wide range of issues have been cited as contributing to the weak growth rates, including tax rates, government debt, companies moving manufacturing overseas, and computerization of labor that has shifted skills in demand. I think that all of these factors have had a meaningful impact; however, considering the structure of the government, I consider fiscal policy to be the aspect of the economy for which the president has the most influence.
However, I do not see fiscal policy, consisting of tax rates and government spending, to be the primary driver of economic cycles. I see economic cycles as fundamentally driven by monetary policy, through the Federal Reserve’s influence on interest rates. Thus, fiscal policy affects the magnitude of economic activity rather than the direction of economic activity.
I perceive that this relationship between fiscal policy and monetary policy has been clearer over the past eight years than it has been at any other time in modern history. Because inflation has been very low, the Fed has been able to keep interest rates close to zero. This makes it virtually impossible for the economy to go back into recession. The fed funds rate has been below 1% since 2008. Under normal circumstances, if the rate were kept that low for several years, the economy would grow gangbusters briefly, and then inflation would rise through the roof.
But why has that not happened? I believe it is because the government’s fiscal policy has put a major damper on economic growth. Current tax rates are inhibiting domestic hiring and business expansion, but the continual threat of a crisis from the national debt load has made it difficult to cut taxes without massive cuts to government spending.
I do not think that either Hillary Clinton or Donald Trump has a fiscal plan that would reduce the debt load in the near term. In fact, regarding the next two to three years, I may even concur with the analysts who say that Trump’s plan would cause a greater debt increase than Clinton’s plan, due to Trump’s unusual proposal of simultaneously cutting taxes and increasing infrastructure spending.
However, I am not averse to increasing the debt short-term as long as economic growth accelerates. The reason I say this is that stronger growth would enable the Federal Reserve to raise interest rates, which would strengthen the U.S. Dollar. A strengthening dollar would keep U.S. bonds attractive on the debt market, helping to prevent a situation in which creditors suddenly demand their money back and the U.S. is forced to default.
Many people are angry at the Fed for keeping interest rates low. They think that the low interest rate policy is a scheme to inflate the stock market and make rich investors even wealthier. Although I think the Fed could have started tightening rates a bit earlier, the bigger picture is that low interest rates are the only reason the economy has stayed afloat in the current fiscal environment. Without the support from loose monetary policy, the current fiscal policy would have put the economy back into a severe recession. Without monetary support, unemployment could have risen to a reported rate of 15-20%, with actual levels even higher. This is what has happened in some Eurozone countries which have high tax rates but no independent central bank to create an accommodative monetary policy.
Thus, I think that some of the frustration with the Fed is misdirected. I understand that there are consequences to keeping interest rates low forever. However, to raise interest rates substantially without detrimental effects, stronger economic growth and job creation need to be generated. That is why I am not opposed to a fiscal policy that cuts taxes even if it causes debt to rise in the short term.
Once the economy accelerates, I would not necessarily be opposed to some of the policies that Democrats are advocating, such as expansion of programs to address socioeconomic inequality, or new environmental regulations. However, bigger government cannot solve problems such as climate change and the shrinking middle class with an economic backdrop of 1% GDP. But if economic growth accelerates, more people will be working, wages will rise, and as a result, the government will bring in more tax revenue, which will enable them to fund programs to address various issues without major tax hikes.
Since this blog is focused on financial markets and economics, I don’t want to detour into subjects that are too far out of scope to address thoroughly. However, I should mention that I do not agree with all the ideas Trump has proposed on immigration and foreign policy. But at the same time, I do not see Trump as promoting the “us vs. them” mentality that progressives are accusing him of. I consider Trump’s worldview to be focused on American competence rather than American dominance. From what I see, he is not an imperialist who believes America has a mandate to impose its influence across the world and purify its culture domestically. Instead, he appears to simply focus on making the U.S. more proactive in its domestic and international affairs.
As everyone knows, there is a lot of controversy surrounding both major candidates involving matters from their pasts. I do not have a firm basis to say that the accusations directed at one candidate are more serious, or more truthful, than those facing the other. Thus, I have decided to vote as a pragmatist rather than an idealist. The question becomes, does one candidate come out substantially better than the other when the potential benefits and risks are weighed out?
I consider that analysis to favor Trump. I see Trump’s fiscal policy as considerably more in line with what the economy needs right now. The risks associated with his proposals on other issues are mitigated by his worldview which I mentioned earlier, as well as the government’s system of checks and balances. Thus, when weighing potential risks and benefits, I consider the balance to be in Trump’s favor sufficiently enough for me to vote for him in this election.