The next president's most daunting economic challenges
No matter whether Republican Donald Trump or Democrat Hillary Clinton wins the race for president in November, America’s next chief executive will need to address a number of daunting economic issues. Adding another hurdle to that challenge is the likely continuation of the harsh partisan divide in Congress that has made life so difficult for anybody residing in the White House.
Here are some of the major economic problems the country faces and how Trump and Clinton might differ in their responses:
Falling productivity: Increases in worker output have been sliding in recent years, slowing the rate of U.S. economic growth, lowering the rate of job creation, reducing tax revenues and cutting the growth of living standards (for some groups, that measure isn’t growing at all).
A president can’t take many steps to revive productivity, which depends on improvements in technology. But if productivity growth stays low or falls further, pressure will ratchet up to adopt policies that can enhance productive potential.
For Clinton and the Democrats, that means a focus on rebuilding infrastructure, making education cheaper and spending more on research and development, particularly in areas such as alternative energy.
Trump and the Republicans are more likely to concentrate on tax cuts for high-income households and deregulation of both finance and business as the primary means of trying to raise productivity growth, despite the lack of evidence that these types of policies had have much of an impact in the past.
Better job opportunities: Both candidates have promised to implement policies aimed at improving job opportunities for the working class, and voters will expect results. Ongoing slow productivity growth is one factor that will make this promise hard to keep, but making good on this pledge will be difficult in any case.
Trump’s plan to close U.S. borders, renege on past trade agreements and impose tariffs on trading partners that don’t bend to his will isn’t the answer. His policies are likely to cost jobs rather than create them.
Clinton’s plan to tax businesses that move jobs offshore, promote technology and innovation, and bring manufacturing jobs back to the U.S. could help some, but this is a difficult problem fueled in large degree by technological change that replaces people with machines.
If the candidates set expectations about what they can do to create good jobs too high -- something that’s tough to avoid on the campaign trail -- voters are likely to be disappointed (which could make it harder for the president to enact other parts of his or her agenda).
The budget deficit: As the economy reaches full employment and interest rates begin to normalize, the carrying cost of the national debt will go up, and political pressure to reduce that debt will mount.
If Clinton wins and Congress is controlled by Republicans, the result is likely to be a partisan struggle over the best way to improve the budget picture: tax cuts or cuts to government spending? Congressional gridlock, threats of government shutdowns, veto threats and other attempts to gain political advantage are easy to imagine, and it’s difficult to predict how the issue would be resolved.
But any compromise solution between Clinton and a Republican Congress is unlikely to deviate too far from the status quo.
If Trump wins, and if he cuts taxes anywhere near as much as he has promised, the budget deficit will surely become an issue. And a Republican-controlled Congress will use it as an argument for large cuts to social programs.
Regulation of the financial sector: Post-crisis regulations are still being implemented, and political pressure is working in opposite directions. Democrats, for the most part, don’t believe the financial reforms so far have been tough enough, while Republicans mostly believe that many reforms already enacted or yet to come are overly restrictive and should be eliminated.
If Trump wins, and Republicans still run Congress, regulations are likely to be rolled back. If Clinton wins, Congress will have a much harder time pushing through a deregulation agenda, and her appointments the Federal Reserve and other regulatory agencies can help to ensure that regulatory reform continues.
Health care reform: As the recent news about insurers abandoning health care insurance exchanges makes clear, Obamacare is likely to need adjustments over time. If those adjustments are made, it will remain a viable program. If they aren’t, the resulting problems could undermine it.
If Trump is the next president, Obamacare will likely be replaced with something else, though exactly what isn’t clear. If Clinton is president, the question is whether she’ll be able to get Congress to make the tweaks to Obamacare that are needed.
Unforeseen events: The next president could -- likely will -- face some type of economic crisis. It could be a financial meltdown, a large downturn in the Chinese economy with worldwide repercussions, a recession in the U.S., a sustained energy price shock -- all sorts of harmful events could hit the economy.
How the country responds will depend in part on whom the president appoints to the Federal Reserve. Will the appointees favor bailouts for large banks, be inflation hawks or doves, endorse nontraditional polices such as quantitative easing in deep recessions, respond aggressively to changes in employment and so on?
The other part of the response, fiscal policy, will also be shaped by the president, though congressional gridlock makes this type of policy difficult to enact, if at all.
But to the extent there is a fiscal policy response, the degree to which it’s made up of tax cuts versus temporary increases in government spending and social insurance programs will be strongly influenced by whether Donald Trump or Hillary Clinton is elected president this November.
