US becomes less outward looking
by Marsha Vande Berg
If Hillary Clinton is sworn in as 45th US president in January, she will face a series of immediate challenges. The political opposition is likely to control at least one chamber of Congress. And there are few, if any, signs that congressional Republicans who eschewed Donald Trump’s candidacy will put valid initiatives ahead of bipartisanship.
Clinton would also be scrutinised for how closely she adheres to the demands of supporters of Bernie Sanders, her main rival in the Democratic primary, to which she acceded in exchange for their support. These focus on affordable higher education for low-income households and increasing the federal minimum wage. Her prospective legislative calendar includes a decision by March on the US debt ceiling and filling a Supreme Court vacancy.
Clinton’s primary focus will be the economy and how to boost growth above this year’s anticipated 2% average. Both presidential candidates have emphasised a transition from growth via monetary policy to growth through fiscal stimulus. The key question is how much new government spending Washington can afford.
Fiscal stimulus to fight ‘secular stagnation’
Clinton’s economic plan reflects a view of the US economy as being in a state of ‘secular stagnation’. In this condition, fiscal stimulus is needed to unshackle the private sector while simultaneously increasing the share of resources going to the middle class and away from the upper 1% of earners.
Tackling insufficient demand and excess savings requires raising the income of lower and middle earners. High-income households tend to save disproportionately more than poorer ones. Greater wealth accruing to well-off groups leads to lower overall demand unless offset by higher borrowing among lower-income households.
This sets the context for Clinton’s tax policy, which sees rates increasing for the wealthy and remaining low for those in the lower and middle-income brackets. She would set the top income tax rate at 43.6% (up from 39.6%) and implement a ‘fair share surcharge’ on those earning more than $5m. She advocates increasing the federal minimum wage from $7.25 an hour to $12 by the end of her first presidential term.
Clinton’s plan is Keynesian in its response to slow growth and seeks to create fairer conditions for the working class. This may expose her to Republican criticism that her policies will lead to a continued decline in the US relative economic power, which they argue has occurred over the past decade. While economic support programmes worth $1.4tn have been implemented during Barack Obama’s presidency, there has been a lack of mobility between socio-economic groups, and output and employment growth have been subdued.
Challenges for monetary policy
Monetary policy stimulus implemented since the 2008 crisis has contributed to increasing inequality, creating difficulties for the Federal Reserve and raising questions over its independence. Improving matters will be complicated. Clinton’s plan to raise the federal minimum wage will encounter the reality of lower structural demand for low-skilled labour as a result of globalisation and technological change.
Clinton’s economic policy places a focus on boosting services and the knowledge economy, in which the US excels, in contrast to Trump’s preoccupation with protecting low-wage, low-skilled manufacturing jobs. Trump’s proposals are hugely popular among large parts of the electorate, but are unlikely to provide the boost to GDP and productivity needed to sustain the US recovery and raise living standards. However, Clinton’s plans do not appear to have placated voters in low-wage sectors facing competition from China and Mexico.
As a result, trade and immigration have become the key issues in this election. Clinton proposes significant reform to immigration laws to address the 11.5m undocumented immigrants living in the US. Estimates indicate that these policies will increase the US population by 3% over 10 years. This is a key method of expanding growth under her economic plan: a bigger labour force boosts tax receipts and adds to demand and consumption.
Trump’s plan to expel immigrants would result in around 3.5m fewer jobs and an unemployment rate of around 7% by the end of his presidency, reflecting lower overall demand due to a smaller working population and aging demographics.
Moreover, Trump’s proposed tax cuts for the wealthy are assumed to be offset by stronger economic activity. But if his immigration policies constrain growth and negatively affect the labour market, these supposed tax cut gains will not materialise. The outlook for trade is a further cause for concern under both candidates, though perhaps less so under Clinton.
Limiting the effect of globalisation
This campaign marks a substantial departure from previous elections, which have tended to focus on how best to achieve economic growth or redistribute economic gains most equitably. Instead, the focus has shifted to how to limit globalisation’s negative impacts. This has resulted in a significant rethinking of America’s role in the global economy and a less outward-looking approach for the country’s politics and economics. This may make it more difficult to secure and strengthen US economic influence both at home and abroad.
Abrogation of global leadership is not an option in the absence of an alternative to the US international role. The next president needs to change the system without irreparably damaging it. Successfully addressing these challenges will require leadership and flexible thinking, rather than isolationism and confrontation.
Marsha Vande Berg is a Distinguished Career Fellow at Stanford University. This is an edited extract from the OMFIF report ‘Candidate Clinton’s chance – Policies for America’s economic challenges’. To request a copy of the report please contact email@example.com.