What we know about the upcoming election

Video Transcript

RICK NEWMAN: From Yahoo Finance, this is "Electionomics." I'm Rick Newman.

ALEXIS CHRISTOFOROUS: And I'm Alexis Christoforous. Thanks for being with us. In this week's "Electionomics," we scour the economy for clues on who might win the White House come November 3. And here to help us do that is Greg Daco. He is chief economist at Oxford Economics and a friend of Yahoo Finance. Greg, always good to see you.

So we know that Trump has touted throughout his presidency the strength of the economy, the strength of the stock market under his tutelage, but all of that changed during the pandemic. I mean, at least for the economy-- we know the stock market has been doing quite well and reaching new highs. But does the fact that the economy has taken such a blow, does that hurt Trump's chances for re-election?

GREG DACO: Yes, I think that overall the COVID crisis does represent a big risk from an economic perspective for the upcoming elections for Trump. As you correctly pointed out, the economy was doing relatively fine in the longest expansion on record, growing for over 10 years with the Trump administration presiding over the last three years of that expansion and a growth rate that was decent, around 2% for the overall economy. The COVID crisis hit, and we saw a significant plunge in economic activity-- actually probably one of the worst plunges in economic activity over the past 100 years.

That has turned the game quite tremendously. It has impacted a lot of people, millions of people. The unemployment rate has surged, and we are in an environment in which incomes, especially for a lot of low-income families, is at risk come this November election.

RICK NEWMAN: So, Greg, you have a forecasting model. I wonder if you can explain to our audience your latest forecast, which is your final forecast I believe. You look at economic numbers state by state, and your models says that Biden is likely to win I think it's 318 electoral votes. So he would win because you only need 270 to win, and Trump would get about I think the number is 220 or around there. Can you explain why the model came out with that?

GREG DACO: Yes, so we have two sets of models. The first set of model is really based on the popular vote, and that looks at economic dynamics like how income is faring-- personal income is faring, how inflation is faring, how the unemployment rate is faring, and whether there is a fatigue factor from the prior administration. The state electoral college-based model is essentially the same type of model looking at similar types of indicators but across states.

And I think what is the key message from our latest run of the electoral college vote model is that essentially in a number of swing states, economic conditions are going to be worse than they were four years ago. And that is going to weigh on the electoral chances of the incumbent party and the incumbent president, which is President Trump. So we have an economic environment which is really pushing in favor of Biden.

I would add to that that a key factor in the upcoming election is going to be voter turnout. That's been a defining factor for the past 12 years, and that is, again, going to be a key determinant of how large the win is according to our models for Biden versus Trump.

RICK NEWMAN: And higher turnout is better for Biden, right?

GREG DACO: That's correct. If we use a neutral assumption of voter turnout being on par with the prior turnouts of the votes over the last 40 years, then we have a win for Biden. But if we were to assume a turnout similar to what happened for Obama back in 2008, then we would really see a landslide win by Joe Biden.

RICK NEWMAN: So I think it's important for people to understand this is not a poll. You're not calling up registered voters or likely voters and asking them who they might vote for, and everybody knows what happened in 2016 when the polls predicted a Hillary Clinton victory and that's of course not what happened. So given that this is not a poll, it's economic modeling, and you are forecasting a Biden victory, what's your level of confidence that you're going to be right? Why should people think that that is, you know, meaningful?

GREG DACO: Well historically our models have been more right than wrong. (LAUGHING) That does not mean they'll be right every single time, but out of the last 18 election cycles, the model has predicted the results correctly twice for the popular vote model, and actually in 2016 it predicted Clinton would win the popular vote, which she did.

I think what we're looking at today is an environment in which the electoral college vote is perhaps more important, more significant in determining the results. And when we look at the state of the economy, I think it's undeniable that in the current circumstances where you've seen millions of people laid off in the wake of the COVID crisis, where you've seen the incomes of many families being negatively impacted-- and barring additional fiscal stimulus will continue to be negatively impacted in the coming months-- and in an environment in which you have this shortfall of economic activity, people that vote with their wallet will actually vote towards a Biden presidency more so than a Trump presidency.

But, of course, there is tremendous-- tremendous levels of uncertainty, and as I mentioned earlier, voter turnout is really going to be key. And in that sense, what we're seeing in terms of early mailing votes is quite indicative, I think, of potential voter turnout in this round.

ALEXIS CHRISTOFOROUS: You also took a close look and you analyzed the economic plans of both of these men. And we talk a lot about Trumponomics on our "Electionomics" podcast, Rick and I. I want to talk about Bidenomics because when you look at his plan, there have been parts of the economy, parts of the stock market that have been scared, frankly, that his tax plan is going to crush innovation, crush job making, force companies to want to leave this country. You know, that's the corporate side of things. But when you take a bigger look at the economy, would a Biden presidency create jobs in the long run after the four years? Would inflation be under control, and would we be able to get this economy back on track in a meaningful way?

GREG DACO: Yeah, I think that the short of our findings on the Bidenomics front is that actually that would be more stimulative than Trumponomics in the first year of the presidency and through the fourth year of the presidency. I think some aspects of Bidenomics need to be clarified. Yes, there's been a lot of talk about Biden suggesting to raise taxes, but the increases in taxes on the income side would largely be towards individuals earning more than $400,000 a year.

Why is that important? It's important because those people tend to have a lower marginal propensity to spend for every additional dollar they get an income. And so the bang in terms of that buck of additional taxes isn't that great when you tax people that are on the higher end of the income spectrum.

The other factor that's key to highlight is the fact that in the latest Biden proposals, there are no tax increases on the income front until 2022. And that's key because we are coming out of an important recession, and as we try to recover, I don't think this would be the right time to start increasing taxes. So overall in 2021, the latest proposals are actually more stimulative than they used to be in the preliminary agenda that Biden had put forward. On top of that, of course, you have increased spending, and that spending is geared towards transfers-- government transfers for health care, education, social services, and those carry a lot of bang for their buck.

RICK NEWMAN: Hey, Greg, we'll go into more detail on the Biden plan, but how did you analyze the Trump plan? I've paid a lot of attention to both sides for the last year because that's what I've reported-- what I've been reporting on. Biden has-- I think somebody tallied up his plans. There are something like 48 detailed plans on his website, and more than 800 individual proposals, line-item proposals. And in a lot of cases he says, I want to spend this much, and I want to get the taxes-- the revenue from that is going to come from these sources. He doesn't-- it doesn't all add up, but there's a lot of detail there.

And Trump by contrast doesn't have anything like that. His campaign just has some bullet points that don't say where the revenue is going to come from or how this or that is going to happen. So how did you analyze the Trump plan to the extent you did?

GREG DACO: We did a lot of digging. We looked on his campaign website. We looked at his budget blueprint. We looked at findings from different centers of research that have done some of this work. And what we came up with was some broad outlines in terms of spending proposals and tax proposals. Now Trump is touting big tax cuts, but if you look in the details of what he's proposing, it's essentially a series of extension of the tax cuts that were put in place back in 2018, the Tax Cuts and Jobs Act.

So for individual income and for corporate businesses, what they entail mostly is an extension of those tax cuts past 2023 for bonus depreciation, for instance, on the corporate side and past 2025 for individual income taxes. That does very little to the economy in the first three years of this plan, and actually most models, including ours, assume that there won't be a tax cliff, that these tax cuts will be extended. So they don't really carry much effect in terms of economic growth.

And if you look at the spending proposals, yes, he's still touting a proposal of an infrastructure plan, but that's been on the agenda for the past three and 1/2 years. And we really haven't seen much. And meanwhile, he's talking about reducing spending on health care, on education, on social services. If you put one and one together, you're essentially left with a spending plan that's slightly contractionary, and that's weighing on growth and depending on when this would be implemented, that would have a negative effect on economic activity. And then we could talk about immigration plans, trade, and protectionism. And those would carry another weight on growth and reduce growth most likely in the coming years.

RICK NEWMAN: I should add that two tax-cut ideas that Trump has floated-- I mean, most people who cover politics say there's no chance these things are going to happen. The big one is he wants to cut the payroll tax that workers and companies pay, but that funds Social Security and Medicare so that just seems like a gimmick at best. And then recently he did say he wants to cut business taxes even further. But I think he only said he wants to cut them from the new rate of 21% down to 20%, and that's not fleshed out either. So can you just sort of summarize for people what you think the three or four main points of Trump's economic plan for a second term is?

GREG DACO: Yeah, so we actually looked at the payroll tax cut proposal, but-- and I'm going to go a little bit into the weeds here in terms of how you can pass bills in the Senate, but you generally need 60 votes to avoid the opposing party opposing that bill. That is always the case except when you use a method called reconciliation where you can pass bills with just above 50 votes. And that's what was used to pass the Tax Cuts and Jobs Act.

But there are certain rules in terms of using that reconciliation process, and that's in particular that you can't touch Social Security. So the payroll-tax-cut proposal would not fly if he did not have at least 50 votes in the Senate. From an economic perspective, that does much less than it would if you were to extend tax credits, for instance, for low-income earners because you're essentially benefiting the people that do have a job and not those that are looking for a job.

In terms of cutting the corporate tax rate, the statutory corporate tax rate, by 1%, that would do very little for businesses. Most businesses don't pay the statutory tax rate. They pay the effective tax rate after deductions and other accounting measures. So the net effect of these proposals is really minimal, and when we're coming out of such a big crisis I think we have to be very careful about banking on these big proposals that may look big in the total numbers but are actually not that large.

ALEXIS CHRISTOFOROUS: I want to get back to the Biden plan because are there segments of the economy that stand to do better under a Biden economic plan than, say, versus a Trump?

GREG DACO: Yeah, what we've done is actually look at the details of his proposals and where the funds would flow. In a Biden presidency, in particular on the spending side, you would see an increased emphasis on infrastructure spending. You would see an increased investment on the environmental front. You would also see increased research and development funding and a lot of funding going towards government transfers.

So sectors that have a connection to those spending plans would do better, so you would likely see greater construction activity. You would likely see greater R&D activity. You would perhaps even see greater spending on health care and greater spending on sectors that serve the general public. All these sectors would do relatively well, and you would likely continue to see a fairly positive drive for the tech sector that we've known has benefited from this broader environment.

So overall I think that in an environment of greater demand, you would see most sectors benefiting. In fact, we find that no sectors would actually feel a pullback in economic activity. But some of the sectors I just highlighted would actually benefit more. The ones that would perhaps lag a little bit more-- agriculture and mining, which we know aren't necessarily always tied to the domestic environment but more tied to the global environment in terms of global demand and oil prices, of course, being drivers of the mining sector.

RICK NEWMAN: We have a lot of problems. We have-- obviously COVID is a problem. We're not even close to being out of the COVID recession. We have a massive national debt, going almost above 100% of GDP. We've got worsening income inequality, worsening wealth inequality. We don't have enough people with good health-care coverage. So, Greg, as an economist, what are the best ideas you feel like you've seen from either one of these candidates in terms of the most effective ways to take on the most important problems-- like two or three of the best ideas?

GREG DACO: Well, first if--

[INTERPOSING VOICES]

RICK NEWMAN: --first if you want to do that.

GREG DACO: Yeah. So first I think the worst idea is focusing on the deficit and the debt too much today. I think it's pointless to be looking at the fact that we have one of the highest budget deficits since the 1950s or that we have a level of debt that has surpassed 100% of GDP. This is absolutely not the time to be focused on these kinds of measures. We're in the midst of one of the most severe, most rapid, and most dramatic recessions of the last century, so really we should be focusing on getting out of this crisis.

And I think that's where we really need to have policies that are focused and centered on a health solution. So I would put a lot of emphasis on pushing the health-care sector to develop solutions to the health-care crisis, whether therapeutics or whether in the form of a vaccine. I would certainly push for a policy that is consistent across the US in terms of controlling the virus.

Today we have a lot of different approaches across the country, which over time tend to hurt us. We've seen already three waves in the US. We had the East Coast wave. We had the West Coast and South wave, and now we're seeing a wave across the Midwest. So having that global-- not globally, but nationally consistent approach to dealing with the virus would be very important.

And then, providing as much stimulus as possible to help the people most affected by the crisis. That means low-income families. That means unemployed individuals. That means small businesses, and that means state and local governments, which will be impacted for the long run if we don't help them address their budget shortfalls, which is no fault of their own but really the result of an unprecedented crisis.

ALEXIS CHRISTOFOROUS: I want to ask about the manufacturing sector, because you had ticked off a bunch of sectors there that might do well under a Biden administration, and we know-- but I didn't hear manufacturing. And we know that this is something President Trump talked about, even when he was on the campaign trail in 2016, saying that he'd be able to bring back those manufacturing jobs.

And I believe it was in the first debate where he said he brought back 700,000 jobs, and the O-- Biden-- Obama-Biden administration added none. I know-- you're not maybe in the business of fact checking, but is-- does that sound right to you, and would Trump be able to bring back more jobs in the manufacturing sector than a Biden presidency?

GREG DACO: Well I think there are two important elements to this question. First is what measures you use when you're counting how many jobs have been created over a period of time. Of course, we know that the Obama administration took over for the US economy in the midst of the financial crisis, and so you have job losses in the first year, which tend to deter any subsequent gains. If you compare the last three years of the Obama administration with the first three years of the Trump administration, a period when there wasn't that much shift in overall economic activity, the job gains on the manufacturing sector are fairly comparable.

Now the second question is whether you can bring back jobs from the rest of the world, and I think that is a myth in the US. We're not going to be bringing back the same jobs that left the US 10, 20, 30 years ago. If we do bring back more manufacturing jobs, they are going to be of a different nature than the ones that we're seeing in other countries. And that's not bad. The question is really whether we have the ability as a country to develop the right types of skills to have people work in these sectors and ensure that everybody is able to work in these sectors. And that's not a natural change-over in the labor force.

That was another myth that was very much present in the '80s and '90s was that people could be retrained and take on higher skilled jobs. That's simply not the case. You need to have a proper follow-through to be able to do that, and you still need to have jobs for the people that aren't as qualified as their peers.

So overall, I think that if we look over the next year, we're going to be in an environment in which the manufacturing sector under a Biden administration would likely benefit from stronger demand, but we're certainly not going to see a manufacturing resurgence in the Rust Belt, for instance. But we're more likely to see some positive gains and recovery from the COVID crisis, but again, unlikely to see a resurgence of the manufacturing sector in the next few years.

RICK NEWMAN: Greg, what about the corporate tax rate? Biden's-- so under Obama it was 35-- it had been 35% for a long time. Trump cut it to 21% in that 2017 tax bill. And Biden says he wants to raise it back to halfway to where it was, to 28%. So you have some people on the corporate side saying, oh my God, why would you-- why would you do that? You know, why would you depress profitability to companies in America now that they're really thriving? And on the, other side, they say, companies will do fine. They did fine under 35% tax rate, so they'll be OK under 28%. Do you have a sense for, like, what is the optimal corporate tax rate?

GREG DACO: Yeah, so I think it's important to look into the details of the corporate tax proposal. Yes, there has been a proposal to reverse half of the cut to the statutory tax rate, but as I indicated earlier, the effective tax rate isn't the same as the statutory tax rate, so a lot of businesses don't really pay the statutory tax rate.

Now even in-- under the assumption that Biden would push forward with the reduction in that statutory tax rate, I think it's also important to look at other components of the Tax Cuts and Jobs Act, including bonus depreciation because that affects new investment, whereas the tax cut influences old and new investment. And what I mean by that is that when we looked back in 2019 at the effect of the 2018 Tax Cuts and Jobs Act, we saw that overall, the cuts to corporate taxes and the expansion of bonus depreciation and the new global taxation environment, all of that lifted business investment by 2 percentage points and added 0.2 percentage points to growth in GDP.

Now if you do half of that and you don't do the bonus depreciation, the marginal effect on business activity is likely to be very, very small and almost not worth calculating. And if you factor in the fact that as of today, the Biden administration is not looking to increase taxes in 2001, you're really not looking at any effect over the next 18 months until you get to 2022.

And one more point is that I think we have to think about a "Biden Lite" scenario. I don't think his full agenda will be delivered as it is today. We have made in our "Biden Lite" scenario, which we think will be the most likely baseline if Biden wins, an assumption of even half of that half of the increase, so a quarter of the increase where the statutory tax rate would go from 21 to perhaps 24% and the effective tax rate would increase only by a part of that. So the effects, in short, on corporate activity would be relatively minimal, and in the short run there wouldn't really be any negative effects through 2021.

RICK NEWMAN: I think you're saying don't worry about the corporate tax proposal too much.

GREG DACO: Well, I'm saying that right now, what we should be focused on is really getting out of this hole. And in the new Biden proposals, there aren't any tax increases in 2021. There are actually some tax credits for children in 2021 which are a lift to lower-income families. So all in all, for 2021 taxes don't really matter.

Now I'm surprised that we haven't seen more movement around and more communication around that aspect because that's been an aspect that the Trump administration has really been pushing hard against, saying that essentially under Biden you would see an increase in your taxes. I'm very surprised that there hasn't been more of a push to communicate that in the new Biden proposals, there aren't any tax increases in 2021. That's the fault of the Biden campaign at this stage.

ALEXIS CHRISTOFOROUS: Is the race getting tighter to your mind?

GREG DACO: Well, I don't know. I think we have to be very careful with any polls, any models, even ours. I think we have to be careful as to how people will eventually vote when the day comes. We have an environment in which the situation politically is quite volatile, quite fluid. We have an administration and a president that are accustomed to a lot of this volatility, but we don't really know how people will come out and vote yet.

We've seen big turnout very early on a lot of mail-in votes. This would tend to show a greater turnout for Democrats and perhaps more of a lean towards Democrats going into election day. But again, there is tremendous uncertainty. You have to be very careful with the polls as we learned in 2016, but a lot of the modeling, a lot of the polls, do point towards a Biden win. I think the extent to which Biden will win the election will likely depend on voter turnout, and that's a big unknown at this stage.

ALEXIS CHRISTOFOROUS: All right. We're all going to be watching. Thanks for helping parse those economic plans for us, Greg Daco of--

GREG DACO: Thank you.

ALEXIS CHRISTOFOROUS: --Oxford Economics. And be sure to follow me @AlexisTVNews.

RICK NEWMAN: And me @rickjnewman. And, Greg, would you like to let our loving audience know where they can find you on social media?

GREG DACO: Sure. They can follow me at @GregDaco or @OxfordEconomics.

ALEXIS CHRISTOFOROUS: All right, we're going to say so long to our loving audience for now. Thanks so much for being with us, and we'll see you next week.