Clinton and Trump on the economy: A last-minute primer

Markets are already getting a lift from the prospect of a Hillary Clinton victory in Tuesday’s election. But what about the economy?

Businesses have said in surveys they’ve reined in hiring and investment this year because of uncertainty surrounding the election. If Clinton wins, “You might get a bit of a sigh of relief… but it’s not going to be a game changer,” says economist Greg Daco of Oxford Economics. He estimates growth the next several months might be a tenth of a percentage point higher after the fog lifts as businesses modestly increase spending.

A surprise victory by Donald Trump, on the other hand, would intensify the angst in corporate America over the Republican’s threats to crack down on immigration and incite trade battles with countries such as China and Mexico, say economists Mark Zandi of Moody’s Analytics and Paul Ashworth of Capital Economics.

Longer-term, Clinton has called for making immigration easier and raising taxes on the rich and big banks to help fund a ramp-up in spending on infrastructure, education and aid to low- and middle-income households. If she got everything she wants, Daco estimates it would boost economic growth from 2% to about 2.5% in 2017 and 2018.

A more realistic scenario is that a Republican House and a split, or marginally Democratic, Senate, scale back her blueprint, nudging up growth to about 2.2% each of the next two years.

“It would result in a meaningfully better economy,” Zandi says.

Trump, on the other hand, wants to slash taxes across the board for households and businesses, get tough on trade and crack down on illegal immigration. Unchecked, his plan could turbocharge growth next year, Zandi says. But he and Daco say it would trigger a recession by 2018. More likely: A compromise with Congress that slows growth to 1.6% next year and about 1.8% for the remainder of his term, Daco estimates.

A breakdown of their major proposals:

TAXES

Clinton: Calls for raising taxes on high-income households, with 90% of the increases borne by the top 1% of earners, the Tax Policy Center estimates.

Clinton hasn’t yet echoed President Obama’s call to trim the corporate tax rate to 28%. Like Trump, she intends to discourage the practice of merging with a foreign company to avoid U.S. taxes. She also has proposed a tax on high-frequency trading, a “risk fee” on the largest banks and an “exit tax” on companies that move operations overseas.

Impact: The tax proposals would increase federal revenue by $1.4 trillion the next decade, the TPC says. The windfall would be spent on initiatives like infrastructure, paid family leave and free tuition at public colleges. Wealthier households tend to save, rather than spend, their extra income. Still, Zandi says the bigger tax burden would dampen spending by businesses and high-income consumers – a drag that, at least initially would be more than offset by the boost from stronger spending by the government and lower-income Americans.

Trump: Combine the seven tax brackets into three, with the top rate falling to 25% from 39.6%. All would pay less taxes, with the lowest-income households owing nothing.

Corporate tax rates would plunge to 15% from 35%. The rate for smaller businesses that pay the personal rate would drop to 15%. Most tax breaks would be scrapped.

Impact: Lower rates for both households and companies initially would spur consumer spending and business investment. The decline in the corporate rate theoretically should make the U.S. more competitive, attracting multinationals and creating jobs. Moody’s Analytics estimates the economy would grow an additional 0.7 percent points in 2017 under Trump’s plan. Daco, however, says the jolt to spending would be more than offset by shocks to business confidence and markets, and possibly cuts in government outlays.

The plan would cut federal revenue by $9.5 trillion over 10 years, the TPC estimates. Trump says the gap would be closed by eliminating tax loopholes, a better economy and cutting government waste.  But Moody’s and Oxford Economics say the bulk of the shortfall would be financed by more debt. That would spike interest rates, dampen borrowing and trigger a recession.

TRADE

Clinton: Wants to crack down on Chinese currency manipulation. She has not been specific but says she’ll triple the number of trade enforcement officers and impose targeted tariffs on countries that violate trade protocols. She initially supported the Trans-Pacific trade deal but reversed her stance.

Impact: Would largely retain President Obama’s open trade policies that have supported U.S. exports, Zandi says. But Daco says Clinton’s latest position poses “the long-term growth risk of protectionism.”

Trump: Wants to declare China a currency manipulator because of its past efforts to push down the value of the yuan, bolstering its exports at the expense of U,S. shipments to China. Has threatened to slap tariffs of 45% on Chinese imports and 35% on Mexican products, and opposes the Trans-Pacific Partnership deal with Pacific Rim countries.

Impact: Such hefty duties would likely trigger retaliation from China and Mexico, crimping exports to those countries and hurting economic growth, Zandi says. Trump's aiming to bring manufacturing jobs back to the U.S., but Zandi says it’s unlikely companies will play ball given the uncertainty of how long the tariffs would remain in place. And Daco says U.S. companies doing business in China would be unlikely to quickly shift to the U.S., where they’ll have to pay higher wages.

INFRASTRUCTURE INVESTMENT

Clinton: Wants to spend $275 billion over the next five years to fund infrastructure upgrades and create a bank to support private projects. Would fund the plan by closing corporate tax loopholes.

Impact: Would increase economic growth by 0.3 percentage points the first year, Daco says.

Trump: Recently unveiled a $1 trillion infrastructure plan that, according to his advisors Peter Navarro and Wilbur Ross, would add nothing to the deficit. Private companies would invest $167 billion that would be mostly funded by tax credits passed by Congress, and the rest would be financed by debt, thanks to currently low interest rates. The tax credits theoretically would be paid for by a more vibrant economy.

Impact: Trump has said such an initiative would create 13 million jobs. Each dollar invested in infrastructure increases gross domestic product by $1.23,Moody’s says. Some economists question whether the cost of the tax credits will be covered by brisker economic activity.

IMMIGRATION

Clinton: Increase legal immigration by 10.4 million over the next decade, and create a path to citizenship for the nation’s 11 million undocumented immigrants.

Impact: The influx of legal immigrants would expand the labor force and result in 6 million more workers, easing employers’ struggle to find job candidates in a tight market and increasing business startup activity and economic growth, Moody’s estimates. The legalization of undocumented immigrants would bolster productivity as they shift to jobs more suited to their skills.

Trump: Deport millions of illegal immigrants and build a wall along the Mexican border.

Impact: Undocumented workers make up about 5% of the labor force and their departure will make the labor market even tighter, Zandi says. Many jobs would go unfilled, curtailing economic output.