Prior to the 2016 US election, Donald Trump made a host of grandiose promises about the transformative impact his policies would have on the US economy. Tens of millions of jobs would be created. GDP would grow at rates not seen in decades. (The record has not exactly lived up to that).)
But, by contrast, Joe Biden has been far less bombastic than Trump about the impact of his own proposed economic policies in the run up to this 2020 general election. Is that just a difference in style between the two men? Or does it reflect a relative lack of ambition in the former vice-president’s economic ideas?
What would the impact of a Biden presidency be on the US economy? Let’s start with Biden’s tax and spending policies.
His manifesto proposes:
A major increase in infrastructure and clean energy spending, certainly more than is currently planned or proposed by Donald Trump
More spending on education, healthcare and the social safety net
A hike in corporate profit taxes, reversing much of the steep cuts made by Trump in 2017
An increase in personal income taxes, mainly hitting the well-off
In total, analysts at the credit rating agency Moody’s estimate Biden’s plans add up to $4tn of additional spending in the three years to 2024 and $1.4tn of additional taxes over that same period.
But there’s more to economic policy than tax and spending. Biden’s pledge to decarbonise the US economy by 2050 implies more regulation of polluting US industries. His more liberal approach to immigration suggests a reversal of Donald Trump’s restrictive executive orders in this area.
His stance on healthcare hints at restrictions on drug pricing. And Biden supports a gradual doubling of the federal minimum wage, which hasn’t been lifted since 2009. And while Biden has promised a tough line on China, it’s generally expected that he would halt Donald Trump’s protectionist trade wars of the past four years.
Analysts at the German bank Berenberg says that Biden “proposes the most expansive tax and spending policies and regulations in modern US history”.
Additional spending planned by Biden in the three years to 2024
But what impact would all this have on the US economy?
The first thing to realise is that the economic impact of a Joe Biden presidency would depend to a considerable degree not just on whether he gets elected but whether the Democrats succeed in retaining control of the House of Representatives and winning a majority in the Senate on 3 November.
A Democratic sweep of Congress and the presidency would enable a much more comprehensive suite of Biden’s policies to be enacted than if the Republicans retain a blocking position in either the House or the Senate.
Analysts at Moody’s project that a Democratic sweep would result in an annual GDP growth rate of 4.2 per cent in the three years to 2024 and 2.9 per cent a year if they were maintained for the full decade.
That would be a stronger performance than recent decades and better than what the same analysts expect as a result of Donald Trump’s proposed policies and also the baseline scenario from current policy. The consultancy Oxford Economics finds something similar.
“Simulations in our Global Economic Model find that Bidenomics could lift GDP growth by 2 percentage points to over 5 per cent year on year by the end of 2021, while a Trump presidency could constrain growth to less than 2 per cent,” says Oxford Economics’ Gregory Daco.
Similarly, on unemployment, the Moody’s analysts think that the “full Biden” would reduce the jobless rate to an average of 5.4 per cent up to 2024 and 4.7 per cent over the full decade. This too would be better than what they expect if Trump’s policies were enacted or the current policy baseline.
Interestingly, despite Biden’s plans to increase corporation taxes, the Moody’s analysis also shows a higher annual growth rate in corporate profits under his plan than under Donald Trump’s, as the economy – and companies’ revenues - grow faster.
“Benefits to long-term growth will more than offset the economic costs from the higher marginal corporate and personal tax rates under his plan that reduce the incentives to save, invest and work," argue Moody’s.
Joe Biden proposes to borrow an average of $2.5 trillion a year in the three years to 2024 – that would be more than the $2 trillion average deficits under the current policy baseline.
US federal debt would be 119 per cent of GDP in 2024 under Biden, rather than 115 per cent under current projections.
Proposed average annual borrowing by Biden in the three years to 202424
“We conclude that Biden’s economic proposals would result in a stronger US economy than Trump’s,” say the Moody’s analysts.
This is largely because economists think, with the economy in crisis and unemployment painfully high, this is the time for stimulus spending.
“Largely because of Biden’s substantially more expansive fiscal policies, the economy would return to full employment more quickly coming out of the pandemic than under Trump,” say Moody’s.
Economists at the US investment bank Goldman Sachs, similarly, state that: “A Biden win…would likely mean greater fiscal stimulus, more cyclical upside [and] less trade policy risk.”
However, if the Democrats fail to win the Senate the assumption is that many of these tax and spending policies would face resistance and watering down in the legislative haggling, meaning the positive economic impact would be reduced.
Moreover, while short-term and “static” modelling exercises are useful for estimating the macroeconomic impact of tax and spending policies they don’t tend to capture the “dynamic” impact of regulatory policies (such as curbs on pollution, minimum wages and immigration policy etc) and taxes on long-term potential productivity growth.
It could be here where some of the largest economic impacts of a Biden presidency are ultimately be felt.
Some analysts argue that Biden’s proposed reforms in these areas would be negative, with authors at the conservative Hoover Institution estimating a pretty substantial long term hit to long-term US GDP and jobs from Biden’s tax rises and new regulations.
Others, however, argue that the kind of policies proposed by Biden to patch up the US social safety net, regulate business and generally get the state more involved in the economy would help long-term US productivity growth, not hinder it.
“Republicans have a long history of claiming that progressive policies would lead to economic disaster,” says the Nobel-prize winning economist Paul Krugman.
“They’ve been wrong every time.”