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Ling Gao
As Vice President Kamala Harris and former President Donald Trump travel the country selling their respective visions for the next four years, they differ starkly on the issue voters say is the most important in this year’s cycle: the economy.
Both candidates bring a vision which, to a certain extent, the American public has seen play out in recent years. Trump plans to continue much of the policymaking he conducted in his first term, such as using tariffs as a form of economic diplomacy, cutting taxes, deregulating and using economic growth to overcome problems in the broader economy.
Harris also plans to extend many of the policies she has collaborated with President Joe Biden with over the past four years, with a new emphasis on tax credits for childcare and small business as well as holding businesses accountable for what she views as price gouging the consumer.
The News spoke with four Yale economists who mostly spoke positively of Harris’ economic policies and were critical of Trump’s economic vision for America.
“The vice president has pretty clearly articulated an economic vision that is very much rooted in her life experience,” said Yale Law School professor Natasha Sarin ’11, who served as deputy assistant secretary for economic policy under the Biden administration. Sarin is also the president and co-founder of the Budget Lab at Yale, a policy research center that develops economic models that reveal the unexamined effects of fiscal policies and regulations.
Sarin noted that Harris grew up the child of immigrants, and she said this led to Harris knowing what it’s like to experience the desire for upward economic mobility in a country that so often has tried to block such mobility for people like her.
As part of her plan, Harris wants to ease the financial burden for families in the U.S. by increasing the child tax credit to $3,600 per child, from the current $2,000, and also establish a brand new $6,000 tax credit for newborns. She also wants to raise the small business tax deduction by 10 times to $50,000 and give first time homebuyers a helping hand of $25,000 to support down payments.
To Sarin, these policies present a positive vision for the economy not only because of the short run economic stimulus they provide but also the long term positive effect they have on society overall. She emphasized the positive impact she will have on the new entrants to the American economy.
One issue of major contention between the candidates is the role of tariffs as a tool for economic diplomacy. A tariff is essentially a tax imposed on imported goods that a company must pay to the home country imposing the tariff, in this case the U.S. In an interview at the Economic Club of Chicago this past Tuesday, Trump told Bloomberg, “to [me], the most beautiful word in the dictionary is tariff, it’s my favorite word.”
Trump’s plan calls for 10 to 20 percent tariffs on all goods imported into the U.S. from all countries and up to 60 percent tariffs if those goods originate from China.
To him, the logic is basic: “The higher the tariff, the more likely it is that the company will come into the United States and build a factory in the United States so it doesn’t have to pay the tariff.”
However, some of the economists who spoke with the News disagree, saying that the cost of the tax can be simply passed on to consumers.
This has led Sarin to refer to Trump’s across the board tariff policy as a “national sales tax” that would lead to an inflationary spiral derived from the tariffs on imported goods.
When asked what the greatest risk a Trump administration has from an economic perspective, Jeffrey Sonnefeld, a Yale School of Management professor, said it is unequivocally his “all tariffs, in all countries, all the time,” approach to U.S. tariff policy.
Historically, tariffs have been used as more targeted, actionable measures designed to be imposed onto specific goods or countries deemed to be against the interest of the United States.
Biden continued many of Trump’s tariff policies and even expanded them, saying in the press release for an expansion of Chinese tariffs, “China’s unfair trade practices concerning technology transfer, intellectual property, and innovation are threatening American businesses and workers.”
But for Sonnenfeld, it is the analysis behind their decision making that is where Trump and Biden differ.
“The Biden administration has and thus the Harris administration will almost surgically address areas where there have been strategic interests and obvious imbalances. The Trump approach is much more chaotic and less grounded in reason, posing a much greater danger of a retaliatory trade war,” Sonnenfeld said.
Trump’s seemingly sudden shifts in policy stances make many economists, including both Sonnenfeld and Sarin, fearful of what he might change his mind on next if given another term.
Some of the economists cited Trump’s recent interview where he described his decision-making process of setting tariffs.
“I put a 50 percent tariff. I started at 25. I raised it to 50, because the 25 didn’t quite do it. I raised it to 50, and that did it,” Trump said in the interview.
But how each of these candidates’ economic policies will actually play out in the broader economy will also largely depend on the actions of the Federal Reserve, the central bank of the U.S. The Federal Reserve faces a “dual-mandate” of both price stability and maximum employment, and it does so primarily through setting the Federal Funds rate, the benchmark interest rate governing interbank lending. Changes in this rate reverberate through the economy by shifting borrowing costs as consumers seek loans to make purchases or finance business activity. As the Fed hikes rates, in general less economic activity occurs, and thus when the Fed lowers rates, the inverse is true.
However, a Harris or Trump administration would not be left powerless in their desire to shape the economy.
“The Fed can’t spend money. If you want to subsidize education or housing, say, or provide incentives for investment, you need the Congress and the President to do that with fiscal policy,” said William English, a professor in the practice of finance at the Yale School of Management.
English spent 25 years at the Board of Governors of the Federal Reserve, including five years as Secretary to the Federal Open Market Committee, or FOMC, which determines monetary policy for the Fed and sets the Federal Funds rate.
Although the Fed cannot be as targeted in its approach to specific sectors of the economy, its effect creates a much greater lasting impact on the economy as a whole according to English.
Some Yale economists sharply disagree with the actions the Fed has taken over the past few years, which in their view has thwarted the Biden administration’s economic policies and could continue to do so should Vice President Harris be elected.
“The Fed has done a pathetic job over the last few years, it has overstated, overcorrected and overhiked from 0 to 5 percent and now they are rushing back again to reel in rates. The Fed should act as a cautious driver, not suddenly going from 0 to 100 miles per hour and then trying to slam on the brakes again,” said Steven Tian, the director of research at the Yale Chief Executive Leadership Institute.
Tian is referring to the Fed’s monetary policy actions over the past four years, in which they initially cut rates to virtually zero to stimulate the economy after the pandemic hit, and the pursued an incredibly rapid pace of rate hikes the Fed in response to inflation. Last month, the Federal Reserve cut rates for the first time since March 2020 in response to positive inflation trends.
But it is the particular role the Fed should play that these two candidates differ on most and also make some economists most fearful.
“The independence of the Fed is central to the well-functioning of the economy. Trump has at times articulated a desire to move away from that model of independence and to exert more direct control on the Fed,” Sarin said. “That may sound attractive in the short run, because you get to set interest rates, and you can juice the economy when you’re approaching elections, or use it as a tool politically, but that’s hugely damaging to the institution, hugely damaging to our global economic standing and the dollar being the default safe asset of the world.”
Sonnenfeld concurred saying that “an independent Fed is the lynchpin of the U.S. financial system.”
The 2024 elections will be held on Tuesday, Nov. 5.
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