While free markets are often cited by economists in the West as the ideal way to allocate resources, noncompetitive forces are extensive and entrenched and can work against the free market mechanism in ways that are difficult to manage politically.
The proposed policies of the two leading presidential candidates present different visions of what will work best for our country in dealing with these problems in the areas of international trade, industrial growth, the housing market, the workings of the Federal Reserve, and other issues. How their policies might play out to affect different income groups and market segments, and the implications for the country’s debt situation, should be considered carefully by well-informed citizens in making their voting choices.
In one sense, Donald Trump appears to advocate for free markets more than Kamala Harris; at least, he wants to cut back on the role of the government in many markets. So on the one hand, he wants fewer tax dollars flowing from individuals and businesses at all levels into government coffers. He wants to remove restrictions on energy production, limit environmental mandates, and scale back the freedom of Federal Reserve policymakers to intervene in financial markets. He wants to cut back the government’s hand in children’s education, including the elimination of the Department of Education and probably other agencies yet to be announced.
On the other hand, he is in favor of more government interventions if they appear to promote the economic interests of the citizens of the United States. A good example of this is his call for more tariffs on imports from all countries, with rates at 60 percent or more on commodities from China, a position that Harris opposes. He has also called for limits on credit card interest rates. However, with these notable exceptions, Trump does not generally advocate price interventions by the government when it comes to the domestic economy.
Harris advocates several actions that would act as “price controls” for the domestic economy. She proposes a ban on “corporate price gouging” on grocery commodities; here she needs to make clear to voters how she would determine what is “gouging.” She wants to move against pharmacy middlemen who raise drug prices and hopes to put mandated limits on the prices of many drugs for a broad spectrum of Americans.
She proposes using the tax and spending power of the government to boost lower-income Americans at the expense of the financial interests of higher-income Americans. Thus, for example, she wants to raise corporate taxes and taxes on individuals earning more than $400,000 per year and raise the capital gains tax. She wants to forgive the debt obligations of many students and make more Pell Grant money available to some. She wants to cancel medical debt for millions of Americans. Harris also wants to keep the powers of the Federal Reserve intact to influence outcomes for Americans via monetary policy.
With regards to tariffs, Harris has called them a “sales tax.” They will almost certainly raise some prices in the short-run, but nobody is sure about what the long-term impact will be. Trump’s ultimate goal is to protect American industry from the onslaught of cheap Chinese goods that has decimated the U.S. manufacturing base in many industries. The impact of the tariffs will probably vary from industry to industry.
The world would probably be a better place if cheap Chinese knickknacks that have relatively little utility—think “pet rocks”—are eliminated from our economy. Antibiotics are a different story. For tariffs on these critical goods to work to the U.S. advantage, there will have to be a serious effort to locate other sources of supply while U.S. companies hopefully get domestic production facilities up and running. These tariffs could be both a powerful carrot and a powerful stick for U.S. entrepreneurs. But this will all take time, and a lot will probably depend on Americans’ sense of patriotism in supporting local manufacturing for all of this to have a happy ending.
One problem with out-and-out price controls is that they are very difficult to enforce, and history has shown many times that they lead to black markets, which may disproportionately benefit the unscrupulous and create shortages for those who play by the rules.
Using price controls against an industry such as pharmaceuticals will be particularly challenging because of the problem of “regulatory capture.” This term means that the pharmaceutical industry has managed to get control of the regulatory “gears” through its congressional lobbying and influence on medical agencies. Any efforts to eliminate debt—as proposed by Harris—or to control interest rates—as proposed by Trump—for any group of citizens are likely to run into the same problem of regulatory capture from the banking industry.
With regard to the policymaking of the Federal Reserve, it is important for all voters to understand the implications of who are the winners and losers from Fed actions. There is no doubt that inflation is painful for just about everyone, but there are trade-offs to any anti-inflation policy that need to be considered. Some might argue that the anti-inflation goals of the Fed slant toward the interests of the banking sector, since creditors lose and debtors win in times of inflation as the value of the repaid debt dollar is diminished.
The economic literature of an earlier era used the term “administered recession” to describe a deliberate slowdown in the economy that the Fed can engineer with monetary policy as an inflationary control. That term has been scrubbed from sources on the internet such as Wikipedia, presumably because it conjures up an image of poorer workers being laid off from jobs for the benefit of richer bankers.
The Humphrey–Hawkins Full Employment Act (entry still available on Wikipedia) is well-meaning but has less sharp teeth than the Fed’s monetary policy.
A question then becomes: Is inflation more serious than unemployment because inflation affects everybody and unemployment affects a much smaller group? Is that like saying the common cold, which affects most people, is a more serious disease than cancer, which affects a much smaller group? And this question doesn’t begin to even scratch the surface of the many complex financial market ramifications of Federal Reserve policy.
How giving the president more control over the Fed, as Trump proposes and Harris opposes, would change any of this is uncertain. It is conceivable that giving political influence over the Fed could introduce even more problems and new ways to destabilize the economy. Hopefully, any president would try to be even-handed in considering the interests of all sides when it comes to monetary policy.
Finally, history has also shown us that policies targeting money to specific groups of economic agents can have unintended consequences. With regard to the current housing crisis, the Harris proposal of a $25,000 subsidy for first-time homebuyers sounds good, but it also raises questions that need to be addressed. Is it enough to make a difference for the average homebuyer compared to the average home price? Might it cause housing overreach compared to income for some buyers and bring in an array of “innovative” tactics on the part of realtors, bringing back memories of the housing meltdown of 2007–2008?
The Harris housing program could require a lot of policing to be run properly. Harris promises to build 3 million new homes. How will that work? Who will get the contracts? How will the product be allocated? Who pays what? These are details that need to be spelled out for voters to evaluate such a proposal.
Of course, the chances that any of these policies put forward by the two candidates could be passed into law by any conceivable party configuration of the two houses of Congress may be small. And if any of the policies on either side should become law, this still ignores the issue of how those policies will affect the staggering $35 trillion federal debt our nation currently holds.
Trump asserts that his policies, including tax cuts, are expansionary and will actually bring in more revenue by increasing the economic tax base and thus lowering the federal debt. Harris also asserts that her policies will grow the economy, presumably lessening the debt burden, by improving the status of the middle class.
Harris has not yet publicly spelled out possible policies that would eliminate government programs and reduce spending. If such cuts are not planned, then without significant tax increases, which would have to get through Congress, and the redistribution that implies, the laudable microeconomic effects of Harris’s policy goals in helping those in need might have to rely on deficit financing.
Granted, this is probably a surer and quicker way to get money to those in need than relying on Laffer curve effects of raising tax revenues through tax cuts and waiting for the rising tide to lift all boats. But the long-run implications of deficit financing cannot be ignored. Election year promises seldom spell out, or even allude to, how those promised benefits will be financed, with the only notable exception in living memory being those of Ross Perot.
A realistic discussion by the candidates of the federal debt implications from their respective policies would be a great courtesy to voters at this critical point in our nation’s economic history.
