Easy fixes sometimes are anything but

Contrasting the Trump and Harris economic planS

Source: Directors & Boards

Politicians like easy-sounding solutions to complex problems, particularly on the economic front. Their fixes often are aimed at pleasing voters who know little or nothing of economics. At times, their efforts smack of pandering and might even be harmless.

But, at other times, they can be quite dangerous — as seems likely with the plans of Donald J. Trump. Just mull over what 16 Nobel laureate economists have to say:

“The outcome of this election will have economic repercussions for years, and possibly decades, to come,” warns a letter signed by Columbia Prof. Joseph Stiglitz, former chief economist at the World Bank; Harvard Prof. Claudia Goldin, former director of the Development of the American Economy program at the prestigious National Bureau of Economic Research, and 14 other Nobelists. “We believe that a second Trump term would have a negative impact on the U.S.’s economic standing in the world and a destabilizing effect on the U.S.’s domestic economy.”

They caution that Trump’s plans, including his goal to impose tariffs of 10 percent to 20 percent on foreign goods and 60 percent on Chinese-made products, will do exactly the opposite of what he’s been promising as he has attacked the Biden-Harris administration for inflation. Just as inflation rates are coming down, those duties would kickstart a price-spiral anew.

Source: Dividend Power

“Many Americans are concerned about inflation, which has come down remarkably fast,” the economists argue. “There is rightly a worry that Donald Trump will reignite this inflation, with his fiscally irresponsible budgets. Nonpartisan researchers, including at Evercore, Allianz, Oxford Economics, and the Peterson Institute, predict that if Donald Trump successfully enacts his agenda, it will increase inflation.”

And listen to some of those folks, who’ve crunched the numbers on Trump’s plans:

The Peterson Institute for International Economics think-tank in Washington calculates that 20 per cent across-the-board tariffs combined with a 60 per cent tariff on China would trigger a rise of up to $2,600 a year in what the average household spends on goods,” reports the Financial Times. “They say that the tariffs would disproportionately hit the low-income households that Trump claims his economic policies help protect.”

And the Peterson Institute is hardly alone. The Tax Policy Center, concurs, albeit with slightly different figures because Trump has floated both 20 percent and 10 percent global tariffs.

“A worldwide 10 percent tariff and a 60 percent tariff on Chinese goods proposed by Republican presidential candidate Donald Trump would lower average after-tax incomes of US households in 2025 by about $1,800, or 1.8 percent,” writes center senior fellow Howard Gleckman, a former BusinessWeek colleague. “They’d reduce imports into the US by about $5.5 trillion, or 15 percent, from 2025–2034.”

The consensus among the experts is that Trump’s plan would hit consumers hard. The effect would show up not only in finished goods made overseas, but in anything manufactured in the U.S. with foreign-made components, as the higher costs would filter through the system. Thus, there would be no escaping the higher prices.

Beyond just ratcheting up inflation, Trump’s plans could drive down gross domestic product and employment.

“Candidate Trump has proposed significant tariff hikes as part of his presidential campaign; we estimate that if imposed, his proposed tariff increases would hike taxes by another $524 billion annually and shrink GDP by at least 0.8 percent, the capital stock by 0.7 percent, and employment by 684,000 full-time equivalent jobs,” says another nonpartisan group, the Tax Foundation.

The kick in the teeth that Trump could deliver to the nation may also come at a tough time, as the economy slows under the Federal Reserve’s so-called “soft-landing” approach. The Fed, the independent group that has the job of reining in inflation, recently lowered interest rates by a substantial half-point in the federal funds rate. That’s because its leaders believe that inflation is moving toward a sustainable 2 percent annual rate, the Fed’s target, without driving unemployment up to unacceptable levels.

The Federal Reserve, source: Investopedia

As the Fed tries to balance employment and inflation, it is no doubt mindful that the national jobless rate recently rose to 4.2 percent after dipping as low as 3.4 percent, a 54-year-low, earlier in the year. The Fed is following classic economic theory: when the jobless rate is too low, higher wages kick up inflation; when unemployment is too high, of course, that’s a red light for the economy.

In time, the lower interest rates that the Fed has engineered should deliver an upward jolt to the economy. That will set the stage for the next president – whoever that is – to bask in the glow of sustainably low unemployment with reasonable inflation. But that president’s policies, if they are inflationary, could tip the balance.

As the experts see it, the outlook under a Trump presidency is hardly cheerful, particularly if his tariffs trigger an all-out global trade war. “The last time we were in a trade war under Trump, the global manufacturing cycle went into a recession,” Julia Coronado, a former Fed economist who now runs the MacroPolicy Perspectives consultancy, told the Financial Times.

Recall that, during Trump’s term, the economy slipped into recession from February to April 2020, a few months before his tour in the White House ended. Covid drove that downturn, which was marked by a jobless rate of 14.8 percent in April of 2020. When Trump left office, the jobless rate had fallen to 6.4 percent and it fell substantially after that, in part thanks to the infrastructure-spending policies of President Joe Biden.

Source: Bloomberg

Contrast Trump’s plan with Harris’s blueprint for stimulating housing construction, particularly for the middle class. She wants to boost housing supply by expanding the Low-Income Housing Tax Credit, providing incentives for state and local investment in housing and creating a $40 billion tax credit to make affordable projects feasible for builders. Mark Zandi, chief economist at Moody’s, and Jim Parrott, a housing adviser under the Obama administration, estimate that America has a shortfall of three million homes right now, and Harris aims to close that gap. The two are advising her campaign on these plans.

Ben Harris of the Brookings Institution, a former chief economist of the U.S. Treasury, concurs that the plan is sound. “Critics assail the high cost of subsidies to developers, but they are the best tool the federal government has to incentivize homebuilding,” he writes. “We desperately need more affordable homes in America – millions of them – and the only practical way to boost supply quickly and meaningfully is to offer financial incentives to local governments to expand zoning for affordable housing and to developers to build it. The vice president proposes to do both.”

To be sure, Harris’s plan to provide $25,000 to first-time homebuyers is drawing less praise.

Calling that “a really bad idea,” Michael Strain, an economist at the American Enterprise Institute, says: “The ultimate beneficiary of that credit is not going to be first-time home buyers. It’s going to be people selling homes.” Economics writer Peter Coy of The New York Times echoes that, saying the plan would do nothing to boost housing stock, but only demand. “Sellers surely would take advantage of the increased demand by raising their prices,” Coy writes. “So a big portion of the taxpayer money that was intended for home buyers would wind up in the pockets of sellers.”

But it’s far from clear how the construction stimulation efforts and the aid to homebuyers would offset one another. A rush of homebuilding in theory should lead to lower prices, and the numbers of people likely to be involved in her $25,000 support effort seem relatively small.

Moody’s estimates that Harris’s down-payment plan would help some 11.7 million more first-time homebuyers, including 2.75 million first-time Black and Latino homeowners. This is just 3.2 million more first-time homebuyers and 1 million more Black and Latino first-time homebuyers than would take place without her plan.

For her part, Harris is doing some pandering by proposing to attack alleged price-gouging, particularly in grocery costs. Quoting a campaign statement, The Washington Post reported that Harris wants to implement “the first-ever federal ban on price gouging on food and groceries — setting clear rules of the road to make clear that big corporations can’t unfairly exploit consumers to run up excessive corporate profits on food and groceries.”

The details were not clear, the Post reported. But it said Harris would aim to enact the ban within her first 100 days, in part by directing the Federal Trade Commission to impose harsh penalties on firms that break new limits on so-called gouging. The statement did not define gouging or excessive profits.

As Alexander Henke, an economics professor at Howard University, told the school newspaper, Harris’s “vague” plan appears to be more like a political economy move than an economic one, tapping into popular sentiment against price gouging by delivering poll-tested messaging. And Harris should know better — she studied economics at Howard and her father, Donald, is a retired Stanford University economics professor.

What’s more, this horse long ago left the barn. Most of the inflation is now behind us, suggesting that the economy is resolving the inflation on its own and there would be few prosecutions.

Just look at the numbers. Prices for food overall rose 9.9 percent in 2022, faster than in any year since 1979, according to the U.S. Department of Agriculture. The hike was especially sharp in so-called food-at-home prices, up 11.4 percent. But the rises have slowed since then, climbing last year by 5.8 percent overall and by 5 percent for food-at-home. This year, the department expects prices for all food to increase 2.3 percent, with food-at-home prices rising just 1.2 percent.

What drove up prices in prior years? Were greedy corporations taking advantage of consumers? Were nefarious or misguided Biden-Harris policies driving up the price of eggs (something VP nominee JD Vance embarrassingly got wrong in a Pennsylvania grocery store photo-op)?

Not according to experts at the Federal Reserve Bank of New York. They point to post-Covid volatility in global commodity prices and a sharp rise in wages for grocery-store workers (likely related to a shortage of such workers). When such “input” costs rise, everyone in the production and retail chain tries to sustain their profit margins. As it happened, foodmakers showed no margin gain in recent years, while retailers showed only a modest uptick in already-thin margins.

Other key elements of the plans of both candidates suggest far different approaches — Trump would take a largely top-down tack while Harris, as she puts it, aims to build the economy from the middle class out. She hit hard on this theme in a Sept. 25 address on the economy and her idea are spelled out on her website.

Source: The New York Times

Harris would boost the corporate tax rate from 21 percent to 28 percent and she has promised not to raise taxes on people making less than $400,000 per year. She wants to restore and expand the earned income tax credit and the child tax credit, including a $6,000 child tax credit for the first year of a newborn’s life. She would also increase the tax deduction for start-up businesses from $5,000 to $50,000, a move she argues would stimulate innovation among all-important small businesses.

By contrast, Trump wants to reduce the corporate tax rate from 21 percent to 15 percent for companies that make their products in the U.S. He already cut the rate from 35 percent during his 2017-2021 presidency. It’s long been known that such moves deplete government revenues. Trump also said he would end taxes on overtime pay and on tips (the tips idea is one Harris also suggests). And Trump also aims to exempt Social Security income from taxes, unmindful apparently of how the Social Security system, even under the current system, will likely be insolvent by 2035 unless policymakers impose a fix.

Trump also wants to extend individual tax cuts he pushed through Congress in 2017, including for the wealthiest Americans. Experts estimate that would reduce revenue over a decade by about $3.3 trillion to $4 trillion.

Harris has also proposed hiking taxes on high-income earners. Americans earning below about $100,000 annually would continue to pay no taxes on long-term capital gains and higher-income families earning up to $1 million would continue paying up to a maximum rate of 20 percent. But those who earn $1 million a year or more would see a rise in the tax rate on their long-term capital gains to 28 percent.

Whether soaking the rich a bit, as Harris proposes, is good or bad economically, it may sell politically. And, if nothing else, it’s likely to do far less harm than Trump’s tariffs would.

Will economics matter in November

Social issues — together with some economic factors — could decide the fate of Team Biden

Source: Investopedia

Economics, we were taught in grad school, assumes that people will act rationally and in their self-interest. But do they always? And do they always act on valid information? Beyond that, can other factors outweigh economic ones?

The coming election may test some common economic assumptions. And it may be decided on matters entirely apart from household finances.

By most Big Picture indications, the U.S. economy is faring pretty well. As President Biden has repeatedly noted, the unemployment rate has been below 4% for the last 26 months, the longest such stretch in more than 50 years. That is a stunning contrast to the 14.7% jobless rate of April 2020, when Covid shut down much of the economy.

And, to take a couple more key indicators, wages have grown substantially since January 2021, when Biden took office, with the 12-month moving average of wage gains starting at 3.4% that month and rising to 5.4% in February 2024 (with an uptick a year ago to 6.4%). By contrast, inflation has slipped to a 3.2% annual rate so far this year, down from its annual high of 7% in 2022, and falling well below the gains in pay most workers are enjoying.

Even in manufacturing – a long-declining sector – employment recently has been topping 12.96 million each month, the largest number since the fall of 2008. While still a far cry from the 17.9 million jobs in the sector we saw in 1990, it’s a healthy gain from the 11.4 million of the worst Covid period in early 2020.

But it is also true that we live in a split-screen economy. Behind the big numbers are unsettling realities that many Americans are having trouble coping with, factors that could outweigh the macro achievements that Team Biden points to. As a friend noted, things are pretty good for the upper middle class and above. Below that, not so much.

Mortgage rates and housing prices are too high for many folks to afford homes, for instance. And high prices, coupled with high loan rates, even put cars out of reach for some — certainly the electric cars that the administration is incentivizing.

“Anyone who wants to buy a house or a car faces a double whammy of higher prices and far higher rates,” The Wall Street Journal noted. “Few are even bothering to apply for a mortgage, with applications for loans to buy a home in the past year at their lowest since 1995. Those who have already achieved the American dream are fine, but it’s getting further away for those still reaching for it.”

And, while inflation rates are coming down, the price of groceries isn’t dropping. Sticker-shock at the cash register continues to be the kind of in-your-face reality that American shoppers face regularly. “Average annual food-at-home prices were 5.0 percent higher in 2023 than in 2022. For context, the 20-year historical level of retail food price inflation is 2.5 percent per year,” the USDA reported. “Price growth slowed in 2023 compared with 2022, when food-at-home prices rose by 11.4 percent.”

Gerald Ford’s failed effort against inflation, source: Wikipedia

Such inflation, it has been said, had a lot to do with turning Jimmy Carter and Gerald Ford into one-term presidents. While the average inflation rate under Biden has been far lower than the others experienced (9.9% on average under Carter and 8% for Ford), Biden’s 5.7% average rate so far has him tied with the rate that obsessed Richard Nixon in his day – hardly a welcome comparison for Team Biden.

And inflation hits some folks far harder than others. Those on the lower end of the economic scale – historically more likely to vote Democratic – are those struggling the most. Many may not realize that presidents have little power over inflation, a challenge that falls to the independent Federal Reserve. But they keenly understand the cash-register effect and that could drive them to seek a change, especially since inflation during the Trump years averaged just 1.9%.

So, if one asks whether a voter is better off now than he or she was four years ago – a line that got Ronald Reagan elected over Carter in 1980 — the answer will vary. Are most voters in Michigan, Ohio and other swing states better off? Unquestionably, they are better off than when Covid raged, but aside from that aberration, are they faring well enough to reward Biden with a second term? Have they been aided enough by the billions Biden pumped into the economy to prevent a repeat of recession after the two-month downturn of early 2020?

Beyond questions of economics, though, social issues such as immigration and abortion policy may weigh heavily, along with the age of both candidates and perceptions about their mental capacities. Will voters recall that Trump quashed bipartisan efforts in Congress to fix the southern border problem, or will they just hear his often-racist podium-pounding on it? Will they react to Republican efforts to bar abortion, even to the extent of curtailing IVF procedures, as the Alabama Supreme Court sought to do before state lawmakers hastily decided to put in protections? Will they consider Trump’s questionable thinking processes, which may far overshadow Biden’s gaffes, as well as Trump’s many self-induced legal woes?

Source: LA Times

Indeed, provided he stays out of jail, will those legal woes help Trump with his backers, as they play into his victim narrative? They certainly keep him in the headlines.

Voters have an extraordinary ability to overlook flaws in the candidates they pin their emotions on. The passion that MAGA enthusiasts feel for their candidate blinds them to his legal and personal flaws, it seems, and their depth of commitment far exceeds the feelings that Biden generates among his backers. Will such passions, coupled with a mixed bag of economic realities, be enough to put Trump back into office?

Moreover, given the distortions of the Electoral College system, where each vote in a less populous and more socially conservative state counts more heavily than each one in more urbanized states, the coming election is hardly assured for the man whose team can claim a lot of credit for restoring a healthy U.S. economy. It’s no wonder the polls put the contenders pretty close to neck and neck. The coming few months promise a lot more drama and, one hopes, better things for voters in time for November.

China: land of contradictions

As we walked to lunch with faculty and a couple administrators the other day, we passed demonstrators holding a sit-in outside the Tsinghua administrative offices. Their placards told of how they wanted more money for the destruction of their homes, which was planned to make way for faculty housing. Our hosts, chagrined by the protest, nonetheless noted that this was an example of free speech. These people, it seemed, had a right to make their grievances known.

It seemed a lot like home. But, then at lunch, we got some friendly advice from a Party official who is a fellow academic. Be mindful of what we say in class, we were counseled. Chinese students, especially those from the countryside, give teachers enormous deference in this Confucian society. Moreover, with social media alive and well in China – through local knockoffs of Facebook and Twitter – anything we say may find an audience well beyond the classroom. Privately, say what you want. Publicly, be discreet. There’s a difference in China between the private and public realms.

We’re not in Kansas anymore, Toto. But, what a perplexing country this is. On the one hand, it has embraced so much about the West. Just look at the soaring skylines in cities such as Beijing, Shanghai and Hong Kong. And consider the recurring 10 percent-plus annual growth rates that put the U.S. and the rest of the economically turbulent West to shame. The Chinese are setting the pace for the world.

School of Economics and Management

Their passion for capitalism is obvious. The school of economics and management here is a towering modern compound fronting on the strip of stunning buildings that adorn a stretch near the main gate. Inside one of the several buildings, portraits of Nobel Prize-winning economists make a long line in the lobby – seemingly, all are Americans, including New York Times columnist and Princeton economist Paul Krugman. By contrast, the university’s school of Marxism is tucked off in a less impressive quarter of campus, housed in a small, older building. I’ve heard Marxism is regarded as a matter of philosophy, nothing quite so practical as economics and management. Certainly, there’s no doubt who these folks want their students to look up to.

Merit is also prized here, whether in school or in government. To join the Communist Party, our colleague explained, one must be in the top of one’s class academically. The Party is for the elite, those who can lead the country, and getting through the application process is tough and time-consuming. Only about six percent of the 1.3 billion people in the country qualify for Party membership (a surprising share, even if that amounts to 80 million folks).

Indeed, the Party leadership is composed of practical men with impressive academic backgrounds. Some have graduated from Tsinghua, with degrees in subjects such as water engineering. The current president, Hu Jintao, is an alum. The children of some of these men now study at Western institutions such as Harvard. These are bright people who, it seems, take seriously the need to intelligently manage a country where vast numbers still live in poverty a world apart from privileged city-dwellers. They seem to want to spread the wealth and manage the growth of their country well.

And yet, there is a limit to how far western approaches go here. I bumped up against it the other day, when I wanted to shoot some photos at a central athletic field on campus. Large numbers of students paraded about the sprawling field in military uniforms. Military training, a student here told me, is required of all freshmen. Indeed, days earlier I saw similar troops of students marching around campus and singing songs of loyalty to the nation. It was reminiscent of years ago in the U.S., when students had to go through ROTC training on many campuses.

Struck me as interesting. But a fellow in a black athletic outfit thought otherwise. “Delete,” he told me politely — but firmly — as he appeared out of nowhere. This was arguably a public place, and certainly would have been considered so in the U.S. Further, he was not in uniform and didn’t say who he was. But I was in no position to argue. I am, after all, a guest in this country and must behave as one. I certainly don’t wish to offend my hosts, whose graciousness has gone above and beyond.

School of Marxism

Odd thing is, other military events on campus seem to be fair game. For instance, I was able days before to photograph a flag-raising ceremony conducted by young people in front of the main administration building. Chinese people were similarly taking photos. That, it seemed, was acceptable even as the larger parade was not.

So, every once in a while, I expect I’ll run into reminders that the rules are different here. As long as I am a guest, I will comply. Anything else would be ungracious, to say the least.

Making business journalism sexy (almost)

Looking for ways to make business journalism come alive for students? How about creating scavenger hunts for juicy tidbits in corporate government filings? What about mock press conferences that play PR and journalism students against one another? Then there are some sure bets – awarding $50 gift cards to local bars for mock stock-portfolio performances and showing students how to find the homes and salaries of university officials and other professors – including yourself — on the Net.

These were among the ideas savvy veteran instructors offered at the Business Journalism Professors Seminar last week at Arizona State University. The program, offered by the Donald W. Reynolds National Center for Business Journalism, brought together as fellows 15 profs from such universities as Columbia, Kansas State, Duquesne and Troy, as well as a couple schools in Beijing, the Central University of Finance & Economics and the University of International Business and Economics. I was privileged to be among those talented folks for the week.

We bandied about ideas for getting 20-year-olds (as well as fellow faculty and deans) excited about business journalism in the first place. The main answer was, of course, jobs. If they’d like good careers in journalism that pay well, offer lots of room to grow and that can be as challenging at age 45 as at 20, there really are few spots in the field to match. These days, with so much contraction in the field, business and economic coverage is one of the few bright spots, with opportunity rich at places such as Reuters, Bloomberg News, Dow Jones and the many Net places popping up.

The key, of course, is to persuade kids crazy for sports and entertainment that biz-econ coverage can be fun. The challenge is that many of them likely have never picked up the Wall Street Journal or done more than pass over the local rag’s biz page. The best counsel, offered by folks such as UNC Prof. Chris Roush, Ohio University’s Mark W. Tatge, Washington & Lee’s Pamela K. Luecke and Reynolds Center president Andrew Leckey, was to make the classes engaging, involve students through smart classroom techniques and thus build a following. Some folks, such as the University of Kansas’ James K. Gentry, even suggest sneaking economics and (shudder) math in by building in novel exercises with balance sheets and income statements.

Once you have the kids, these folks offered some cool ideas for keeping their interest:

— discuss stories on people the students can relate to, such as the recent Time cover on Mark Zuckerberg or the May 2003 piece in Fortune on Sheryl Crow and Steve Jobs, and make sure to flash them on the screen (at the risk of offending the more conservative kids, I might add the seminude photo BW ran of Richard Branson in 1998)

— scavenger hunts. Find nuggets of intriguing stuff in 10Ks or quarterly filings by local companies or familiar outfits such as Apple, Google, Coca-Cola, Buffalo Wild Wings, Hot Topic, The Buckle, Kellogg, etc., and craft a quiz of 20 or so questions to which the students must find the answers

— run contests in class to see who can guess a forthcoming unemployment rate, corporate quarterly EPS figure or inflation rate

— compare a local CEO’s pay with that of university professors, presidents or coaches, using proxy statements and Guidestar filings to find figures

— conduct field trips to local brokerage firm offices, businesses or, if possible, Fed facilities

— have student invest in mock stock portfolios and present a valuable prize at the end, such as a gift certificate or a subscription to The Economist (a bar gift card might be a bit more exciting to undergrads, I’d wager)

— follow economists’ blogs, such as Marginal Revolution and Economists Do It With Models, and get discussions going about opposing viewpoints

— turn students onto sites such as businessjournalism.org, Talking Biz News, and the College Business Journalism Consortium

— have students interview regular working people about their lives on the job

— discuss ethical problems that concern business reporters, using transgressors such as R. Foster Winans as examples. Other topics for ethical discussions might include questions about taking a thank-you bouquet of flowers from a CEO or traveling on company-paid trips, as well dating sources or questions about who pays for lunch

— discuss business journalism celebs, such as Lou Dobbs and Dan Dorfman

— discuss scandals such as the Chiquita International scandal (Cincinnati Enquirer paid $10 m and fired a reporter after he used stolen voicemails)

— use films such as “The Insider,” “Wall Street,” and “Social Network” to discuss business issues

— use short clips from various films to foster discussions of how businesses operate. Good example: “The Corporation”

— team up with PR instructors to stage a mock news conference competition pitting company execs in a crisis against journalism students. Great opportunity for both sides to strut their stuff.

We also heard helpful suggestions from employers, particularly Jodi Schneider of Bloomberg News and Ilana Lowery of the Phoenix Business Journal, along with handy ideas from Leckey and Reynolds executive director Linda Austin, a former business editor at the Philadelphia Inquirer. My biggest takeaway: run some mock job interviews with students and teach them to send handwritten thank-you notes.

And we were treated to some smart presentations by journalists Diana B. Henriques of the New York Times about the art of investigative work (look for her new Madoff book), the University of Nevada’s Alan Deutschman about the peculiar psychologies of CEOs (narcissists and psychopaths are not uncommon), the University of Missouri’s Randall Smith’s view of the future for business journalists (it’s raining everywhere but less on business areas). We got some fresh takes on computer-aided reporting, too, by Steve Doig of the ASU Walter Cronkite School of Journalism and Mass Communication as well as on social media by the Reynolds Center’s Robin J. Phillips.

For anyone interested in journalism, especially biz journalism, it was a great week. As I take the lessons from ASU to heart, my students will be better off. My thanks to the folks there.