The U.S. economy would fare best if Democrats made a clean sweep of it in the election now underway, keeping their House majority, winning the presidency, and overturning the Republican majority in the Senate, according to “The Macroeconomic Consequences: Trump vs. Biden,” a study by two economists at Moody’s Analytics.
Economists Mark Zandi and Bernard Yaros write, “In this scenario, the economy is expected to create 18.6 million jobs during Biden’s term as president, and the economy returns to full employment, with unemployment of just over 4%, by the second half of 2022.” Average annual growth of gross domestic product through 2024 would be 4.2%. Real after-tax income would increase by around $4,800. By the end of his term, gross domestic product would have risen by 4.5% more than under four more years of Donald Trump.
But the analysts give this optimistic outcome only a 20% probability of happening. In their view, the most likely scenario—at 40% probability—is a Biden win with Democrats keeping the House but failing to gain a Senate majority.
A reelection of Trump, with the House majority remaining Democratic, and the Senate continuing to be ruled by Republicans they give a 35% probability. Least likely, at 5%, is the scenario of a clean sweep by Republicans. In both scenarios in which Biden wins, the economy would do better than in either scenario in which Trump wins. No real surprise. Americans have generally done better economically under Democratic presidents since Franklin Roosevelt stepped into office nearly 90 years ago.
As with any such analysis, there are a lot of spoken and unspoken ifs. The authors write:
Quantifying the economic impact of Trump’s policies is complicated by their lack of transparency and specificity. This requires us to make more assumptions regarding their design and size. Evaluating Biden’s policies is complicated by the wide range of his proposals. Some are familiar and we have already modeled and analyzed them, including some of his plans for tax increases, infrastructure spending, and the minimum wage. However, some of his other proposals are more novel, such as for eldercare and clean energy infrastructure. [...]
Low- and middle-income households are the primary beneficiaries of Biden’s economic proposals. Their tax bill will remain roughly the same as it is today, but they are significant beneficiaries of increased government spending on education, healthcare, housing,a plethora of other social programs, and a larger economy. High-income and wealthier households pay meaningfully more in taxes under Biden’s policies, as do corporations.This weighs on stock prices and dividend income, the benefits of which largely accrue to those in the top part of the income and wealth distribution.
Much of the gain under Biden, according to Moody’s, would come from his more extensive fiscal policies, including trillions of dollars for a drive toward clean energy, his reversal of Trump trade and immigration policies, and his tax reforms. Biden would spend far more than Trump, which would add to the national debt, but his policies would also generate significantly more growth than Trump’s, and more tax revenue, with the GDP-to-debt ratio at the end of 2024 hitting about 130% compared with 108% currently. That would put the ratio into World War II territory when the U.S. incurred more debt to quickly transform its economy and defeat the Axis powers. As Republican rally cries go, complaining about the national debt doesn’t have quite the punch it previously has had given the GOP’s relentless penchant for expanding that debt to fund tax cuts for the wealthy while decrying rises in social funding.
In the unlikely scenario of an across-the-board Republican victory, Zandi and Yaros write, the situation would be vastly different.
The analysts calculate that just 11.2 million jobs would be created under Trump’s second term of office, 7.4 million fewer than under Biden. It would take two years longer—until the beginning of 2024—to return to full employment, which they set at just under 5%. The average American household’s real after-tax income would “not change much during the president’s term. The homeownership rate and house prices increase modestly, and while stock prices rise, the gains are limited given high current market valuations and pedestrian growth in corporate profits due to the more slowly growing economy.”
With a split Congress, with or without Biden in office, economic growth would be considerably slower, they conclude.
Tory Newmyer at The Washington Post reports that Goldman Sachs and Oxford Economics have speculated that even if the economic policies Biden is proposing were pared down by the Senate, the United States would return to full employment faster than under Trump.