US special: Kamala Harris or Donald Trump?

Next week, the 5th of November is Election Day in the US. Of course, the main question is: will Kamala Harris become the next President of the United States or will we see the return of Donald Trump? Since February, when we published our report on the impact of Trump’s universal tariff, we have had a Trump victory as the main assumption for our baseline economic forecast. However, we made this assumption when Biden was still at the top of the Democratic ticket. When the Democratic Party and their donors realized that Biden was not going to win, they replaced him. In The Harris Bounce, published on September 3, we wondered whether Kamala Harris could sustain her rise in the polls until Election Day and gain a robust lead in the Electoral College, or whether her early September lead in the national popular vote was as good as it was going to get. Since then, her poll results never implied a sustained lead in the Electoral College, so we never had a data-based case to alter our baseline economic forecast and assumption of a Trump victory. In fact, recently Trump has been closing the gap in the national polls.

Admittedly, this has been a Bayesian argument based on a Trumpian prior, because we made that call in February, when we assumed that Biden would be the Democratic candidate. While we were evidently right in assuming Biden was a losing candidate, we had not anticipated that he would be pushed off the Democratic ticket on July 21. Had he remained the candidate, we would have had much more confidence in our baseline than we do in the current situation, where things appear so close that polling error could be the decisive factor in whether we are right or wrong in maintaining the Trump baseline. Therefore, as in The Harris Bounce, we discuss both possible outcomes of the US presidential election. In this special, we update our comparison of the two presidential candidates, especially with more detail about Harris’ fiscal and trade policies, as far as her “word salad” strategy allows. Let’s first repeat what we could expect from Trump, then update what we know about Harris, and finally compare the two of them.

What can we expect from a second term of President Trump? If we look at domestic and fiscal policy, that really depends on Congress. In the US, Congress has the power of the purse, which means that the President depends on Congress to get the money he needs. If the Democrats keep their majority in the Senate or gain a majority in the House of Representatives, then Trump cannot do much in terms of fiscal policy. However, if the Republicans keep the House and win the Senate, we are likely to see big tax cuts again, for both corporates and households. Republicans also like to deregulate, and Trump has his mind set on terminating the electric vehicle purchase credits. Finally, Trump wants to stop the flow of illegal immigrants at the southern border.

If we turn to foreign and trade policy, then Trump actually does not need a majority in the Senate and the House. Over the decades, Congress has delegated certain foreign policy and trade policy powers to the President. This means he can singlehandedly decide to impose tariffs on other countries. Trump used these powers in his first term and has promised to do the same in his second term. More specifically, he has proposed a universal tariff of 10% to 20%. That is, on all imports of goods. Of course, he has a more aggressive approach in mind for China: about 60% on imports from China, and even 100% on Chinese EVs imported from Mexico. Trump’s plans for foreign policy are especially relevant for Europe. He wants to reduce support for Ukraine and get a quick peace deal done and is not very fond of NATO.

What about Trump’s rival, Kamala Harris? Right wing commentators keep complaining that she is not very specific about her policy plans, but she has been consistent from the start about a few key points of her program. To a certain extent, Harris is on the same page as Biden. Just like Biden, she wants to reduce healthcare costs. This was a big part of the so-called Inflation Reduction Act and the part that really deserved the label “inflation reduction,” as a lot of the IRA was about the climate. Like Biden, Harris also wants tax cuts for the middle class and, of course, tax hikes for the rich and the corporations.

However, there are two new policy plans that show a different emphasis by Harris. She has mentioned these priorities from the start of her run and continues to put them on the agenda. The first is her plan to stop price gouging in the food industry. Price gouging means that businesses raise their prices much more than is needed, boosting their profits rather than passing on their rising costs. This goes much further than Biden has done. Whether this is a good idea remains to be seen. If she wants to contain prices by making the food industry more competitive, that should be a good thing. However, if she want to introduce price controls, then things will become chaotic. If you keep prices artificially low, the food industry will reduce its supply, and shortages will occur. You are basically messing up the market mechanism. The second Harris-specific plan is to deal with the housing market shortages. A key proposal is to give USD 25,000 down payment support for first time home buyers. Sounds attractive to voters, but what does it really mean? If you give every first time home buyer USD 25,000, what will happen to the housing market? You will drive up prices for a given amount of homes and the extra USD 25,000 will not get you very far. The main effect will be that the federal budget deficit will rise. But voters like it, so Harris continues to repeat it.

So let’s compare the two candidates, Harris and Trump. We already talked about Trump’s trade policy, which entails a universal tariff of 10% to 20% on all imported goods and even higher tariffs on Chinese imports. What can we expect from Harris? She clearly rejected a universal tariff during the only TV debate with Trump, because she rightly thinks it will end up as a tax on consumption, as importers will pass on the tariffs to their customers. Most likely, Harris will extend Biden’s policy of targeted tariffs on Chinese strategic imports. These are imports of goods produced by industries that threaten America’s technological superiority. Keep in mind that after a thorough review, President Biden decided not to revoke the tariffs from Trump’s first term, instead adding to them. In this respect, Trump has opened the eyes of both the Republicans and the Democrats to the fact that China is America’s main competitor and not a friendly trading partner. Perhaps he does not get the proper credit for that.

For us in Europe, it is important to note that in the absence of Trump’s universal tariff, we are less likely to face tariffs if we export to the US. However, that does not mean that there will be no tariffs. In the first place, there is still an ongoing discussion between the EU and the Biden administration about tariffs on steel and aluminium. If this is not solved, we could still get tariffs if we want to export steel and aluminium to the US. Secondly, several European countries have imposed or are planning to impose digital services taxes. These will primarily hit the tech industry in Harris’ home state of California. The US has already threatened to impose tariffs on a range of goods from these European countries if the digital services tax is not removed. Harris is likely to carry out this threat; over the years she has developed a good relationship with the California tech sector So if Harris becomes president, European exporters to the US will not face a 10% to 20% universal tariff, but certain sectors may still have to deal with more specific tariffs.

Let’s compare fiscal policy. As we discussed earlier, a President really needs support from Congress for carrying out fiscal policy plans, because Congress controls the federal budget. In practice this means that if we have Divided Government,[1] we are going to see “gridlock” and not much fiscal policy except on overlapping priorities, such as infrastructure or subsidizing the US manufacturing sector. However, if Harris wins, and the Democrats keep the Senate and win the House of Representatives, then the Democrats can pretty much do whatever they want. This means a lot of spending on green and social programs, tax cuts for the middle class, and tax hikes for the rich and for corporations. In contrast, if Trump wins and we get a Red Wave, which means that the Republicans keep the House and win a majority in the Senate, then the Republicans are likely to spend a lot of money on upgrading the US military to make sure it can deal with the threat from China. However, they are less likely to send money to Ukraine and Trump will probably force Ukraine to take a quick peace deal. Trump is more focused on taking on the Chinese than on taking on the Russians. He has also promised large tax cuts, also for the rich and large corporations.

Note that we published table 3 earlier in The Harris Bounce, although our discussion was much more limited and did not include Harris’ possible trade actions toward the EU and her policies on price gouging and the housing market (see Table 2).

[1] This means that there is no single party that controls the White House, the Senate, and the House of Representatives at the same time.

[2] I would like to thank the RaboResearch Economic Scenarios and Projections team, in particular Kan Ji, Frank van Es and Hugo Erken, for providing the simulations and calculations.

This means that our forecasts do not yet take new fiscal policy initiatives into account. Since both candidates would implement expansive fiscal policies in case of support from Congress, this would likely lead to stronger GDP growth, lower unemployment rates, and higher inflation rates. However, purely based on the trade policies of the two candidates, the simulations clearly show the adverse impact of Trump’s universal tariff: inflation rises and GDP growth slows down.

Since it remains uncertain how much of Trump’s threats on trade will materialize, in our baseline forecast we assumed that Trump will apply a universal tariff of 5%. In the NiGEM model, this is already enough to cause a rebound in inflation that should stop the Fed’s cutting cycle in its tracks. However, in a sensitivity analysis, we also ran a more extreme Trump scenario with a universal tariff of 10%. This generates a bump in inflation to 5.4% in 2026 rather than 4.0% in our baseline with a 5% tariff. This illustrates how much impact the universal tariff could have on inflation (see Figure 2).

It’s now up to the US voters, who have already started early voting. As we showed in What drives US voters?, based on individual voter data, the economy is likely a drag on the Harris campaign. However, there are opportunities to offset this through social policy issues such as abortion. The Biden-Harris administration may not get all of the blame for the economic hardship caused by inflation, and voters may make a trade-off between the economy and other issues.

Meanwhile, contested elections may become the rule rather than the exception in the United States, as we noted in Elections tariffs and lawfare. Crumbling institutions could undermine the strength of the economy in the long run. In the short run, if election unrest unsettles the markets, this could force the Fed to make a jumbo cut at its scheduled meeting on November 7 or at an emergency meeting.

Looking ahead, we think that if Trump becomes President, we are going to see a rebound in inflation once he imposes a universal tariff. For the Fed, this will mean that they will have to pause the cutting cycle. So they will have to stop much earlier and at a higher level than they now expect. In fact, if inflation once again gets out of control, the Fed could even be forced to start hiking again. In contrast, if Harris wins, there will be no universal tariff, so we are likely to see less inflation than under Trump. This makes it more likely that inflation will continue to fall to 2% and the Fed can continue with its cutting cycle. This shows how important the election outcome will be for the Fed. A Trump victory could bring back inflation and completely destroy the Fed’s current plan.