David Rosenberg: Love him or hate him, an economy under Trump should fare better than under Harris

Mark Twain, if he were alive today, would likely update his famous refrain to “Lies, damned lies, statistics and politics.” I want to state emphatically that I am not “political,” and this is not one iota an attempt to be “political”. Being a Canadian resident and citizen, I am not even eligible to vote on November 5th . When I penned something critical of the Democrats a couple of months ago, I received my fair share of hate mail and had some subscribers threaten to cancel their subscription with me. The problem is that politics, markets, and economics are all intertwined, and everything I write is aimed at being analytical rather than judgmental.
First, let me address the latest Goldman Sachs report, which claims that a Trump victory would be more damaging to the economy than a Harris sweep. I have no idea what the Goldman model posits, but it likely underestimates the multiplier impact from corporate tax hikes, to depressed profits, to a negative capex cycle, and the leakages this exerts on job creation and consumer spending — this swamps the static impact of giveaway tax credits to low-income households (which will be used to meet their food, rent, and utility bills but do little to spur the cyclical segments of the economy).
Second, and believe me, I am not at all part of the Trump base, but the facts are the facts, and the facts are that all Trump intends to do is extend the economic policies of his 2016-2020 tenure, which delivered a +2.8% annualized real GDP growth trend from the time he got elected to the time the pandemic unraveled the economy in early 2020. Employment over this time frame expanded by 7 million. The unemployment rate fell from 4.7% to 3.5%, and this occurred even with the labour force participation rate expanding from 62.7% to 63.3%. Despite all the hue and cry over how his tight immigration curbs would impair the labour market, up until COVID-19, the labour force managed to surge by 5 million or over 3.0%. The share of the population that was employed sat at 61.1% by the time the pandemic hit, up from 59.7% when he first got elected. And his tariff policies, in the end, only proved to have been a level price shift, and did not generate the inflation that so many pundits claimed would happen.
So, love or hate him, and there are a ton of folks in the latter camp, as I say, the facts are still the facts. His policies fostered a +4% annualized trend in volume capital spending compared to sub-3% under the current administration, even with the Chips Act and an array of other subsidies, which goes to show that there is no antidote for growth in the productive capital stock other than good old-fashioned reductions in top marginal tax rates.
Because of the massive US$2 trillion stimulus checks doled out in early 2021, what the Biden team engineered was a consumption society, with a +3.4% annualized trend in household spending, doubling what the Trump policies managed to accomplish. But tax gimmicks to incentivize consumers to spend are not a replacement for the durable benefits from all the multiplier impacts that flow from business spending (after all, unless you are self-employed, it is the business sector that employs people) and the associated deepening in the productive private sector capital stock.
I can’t imagine that this sort of rational economic thought would ever make it on the campaign trail since it would be over most people’s heads, and let’s face reality, which the Democrats have certainly figured out — nothing works better in an election race than playing the role of the Candy Man.
Third, I find it amazing that the Democrat ticket is suddenly so concerned about inflation. The inflation their party helped create, no doubt. Cheering over the fact that inflation is now below 3% is a small consolation since this 3% inflation rate compounds off a price spiral from 2021 to 2023 that has completely eroded real purchasing power for the working class. While virtually everything that comes out of Donald Trump’s mouth needs to be fact-checked, the Democrats seem to be getting a free pass — but not from me. Both parties are guilty of gross misstatements. This is not about crowd size, the number of illegal immigrants and their criminal activities, abortion, or who was responsible for the mess the world finds itself in today (Iran, Israel-Hamas, the Houthis, Russia-Ukraine). This is about the facts as they pertain to the economy, and specifically inflation and all its corrosive effects on society. Here’s what consumer prices did both under the 2016-2020 Trump/Pence regime and the 2020-2024 Biden/Harris team.
The party whose fiscal policies generated a sugar-high in terms of consumer spending also led to the most pernicious inflation experience in over four decades. And while the government doled out stimulus checks and pledges to continue to run an economy on tax credits and subsidies, what actually happened to the workers of the country since November 2020, was the inflation that was created, generated a 3.4% contraction in real average weekly incomes. Over the entire Trump era, real work-based incomes expanded by 7.7% so I have to say, there was no need to play “trick or treat” with the population.
I can understand that this is not going to make Democrat supporters (or Trump haters) very happy, but these are the facts. If the election comes down to character and personality, Kamala wins. But if the economy emerges as the #1 issue, then it is just the truth that the Democrats own the massive bulge in prices over these last nearly four years, and the problem with Trump is that he spends too much time on personal attacks than staying on point. Any other GOP candidate would be running away with this thing based on what happened to inflation alone in these past few years, and it transcended the effects of the pandemic — (most of that run-up in the inflation rate into the summer of 2022 took place nearly two years after Pfizer’s “Vaccine Monday”) and was induced by reckless and feckless fiscal policy (financed via the Fed balance sheet).
Speaking of fiscal policy, both parties share the shame of bringing the United States into a state of budgetary incompetence. The national debt under Trump from 2016 to 2020 surged nearly US$8 trillion and that was then matched by what Joe Biden accomplished in his near-four-year term. Neither party can claim high ground on this issue — just run up the debt to stratospheric levels and pray that the U.S. doesn’t sleepwalk into a fiscal crisis like Canada did in the early 1990s.
Be that as it may, if the GOP campaign can simply focus on what inflation did in Trump’s first term and compare and contrast to what it did in this latest Democrat term, the path to electoral victory will be a lot easier than the targeted attacks on the Harris/Walz ticket, which are landing on deaf ears outside of the hard-core Trump base.
But what is most critical is what the two policy plans mean for inflation. It remains to be seen if Trump actually ends up embarking on a massive and broadly based run-up in tariffs. That seems more like a threat, but who knows? If he does as he says, it will not be inflationary in a classic sense, but it would surely represent a one-time shock to prices and real wages, and it would offset much, if not all, of the other pro-growth aspects of his proposals.
The view that his immigration curbs would lead to an inflationary spiral ignores two realities: (i) this never happened in his first term, and (ii) at 6.0 million, the number of unemployed nativeborn Americans is +15.5% higher today than it was pre-COVID and that represents a homegrown source of labor supply which undoubtedly will be tapped. Outside of the COVID-19 spike, this is one of the largest amount of domestically-based idle labour since 2017.
The Harris plan is far more problematic when it comes to inflation, which does make her emphasis on containing inflation through price controls rather fascinating. And I will tell you why. To gauge where inflation is going, you need to know what is going to happen on the demand side and on the supply side of the economy. Kamala’s spending program, especially on the multitrillion Green New Deal platform, will cause the aggregate demand curve to shift up and to the right. But the real dilemma lands on the supply side. Her plans to tap unrealized capital gains will surely weigh on the equity market, not to mention raising the top rate to 28% from 20% for those earning US$1 million or more (though falling short of Joe Biden’s plan to go as high as the 39.6% ordinary personal income tax rate). And her proposal to hike top marginal corporate tax rates will also impinge on capital spending plans.
When we trace through all the effects here, it leads to a downward left-leaning lurch in the aggregate supply curve. So, if you can picture these two curves interacting, it leads to higher inflation. Likely a word I have not used in decades: stagflation. The real issue is that even as the policy plan delivers more tax credits to low- and middle-income earners, it is the business sector that determines the trend in productivity. The negative effects on capital formation are critical here because we all know from basic economics that the reduction in the capital-labour ratio (perhaps good social policy from an income redistribution standpoint, but beware the laws of unintended consequences) will impair the one bullish development the economy has going for it right now, which is productivity growth. That ends with these tax policies that hit squarely on capital and risk-taking. This is not what is well advertised because it is not well understood — that real wage growth inevitably converges on productivity growth.
So, even with all these Robin Hood policies that seem so positive on the surface, by triggering the onset of a negative profits cycle, and considering that wages are paid out of retained earnings, there is going to be a huge offset from the various tax credits via compression in organic work-related income — which represents 60% of total disposable earnings in the personal sector.
One word here on the Harris’ plans to deliver $25,000 downpayment assistance to first-time homebuyers. I cannot believe that nary an economist has not come down hard on this nutty proposal. First, this is hardly going to spin the dial in a world where the average price of a newly built home in America is $515k. A colossal waste of taxpayer money just to buy votes. More candy, please! But think of it another way. If it does spin the dial, think of all the wannabe homebuyers who take the leap without the financial wherewithal to meet their monthly payments. A $25k downpayment gift is not going to redress the debt-service commitment. But if I am wrong and this policy proves “successful” and drives a push for renters into the homeownership market, the risk is that these unsuspecting souls who simply aren’t ready to take the plunge end up in default. In any event, what is forgotten is that the person who presses the “aye” or “nay” button when it comes to issuing a mortgage is the loan officer at the local bank, and one thing a $25k gift does not do is change somebody’s credit score. I have no idea as to who it is that is giving Kamala Harris economic advice, but they should be summarily fired. I’m not talking here as a political pundit — this is just bad economic policy.
I am only looking at the situation through the lens of an economist. My major point is that it is a shame that we have an election where personality is so dominant, as if this is a contest for high school head boy and head girl, instead of the media spending the time analyzing the economic implications of each platform. There is much to be desired in both plans, to be sure, but the party that presided over the inflation bulge these past three years will only serve to exacerbate the inflation if the policies being advertised come to fruition. That will indubitably cause a headache for the Fed, and it will also create a migraine for me as far as my long-standing bullish call on bonds is concerned.
So, no matter who wins the keys to the White House, what we should all be praying for is a split government. Checks and balances mean fiscal gridlock and no nonsensical policies getting through both the House and the Senate. In other words, gridlock is good and a result that investors (and society) should be hoping for.
More from Rosenberg Research: These will be the stock market sector winners and losers after the U.S. election
David Rosenberg is founder of Rosenberg Research.
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