Trump vs. Harris: Economic trust shapes tight race

The preliminary results of the U.S. presidential elections may be known on election night, from Tuesday to Wednesday Eastern Time.

 Polls are mixed, but recent ones more often give the Republican candidate, former President Donald Trump, a slightly higher chance of winning over his rival, Kamala Harris, the current Vice President. Betting market participants also see a higher probability of Trump’s victory.

The economy is the number one topic in this year’s election campaign, and Donald Trump is more trusted in this area. For instance, in a recent public opinion poll conducted by the New York Times and Siena College, 52% of respondents believe he would be a better economic manager than Harris, while 45% disagreed.

These opinions are unsurprising given the recent development of American consumer sentiments. The University of Michigan's consumer sentiment index was 70.5 points in October. This is higher than the average of the last four years during Democrat Joe Biden's presidency but lower than at any time during his predecessor, Donald Trump's, tenure.

Even in 2020, during Trump’s last year, when U.S. employment plummeted due to the COVID-19 pandemic and the unemployment rate surged, Americans rated the economy and financial prospects better than today. Meanwhile, Harris continues Biden’s policy despite announcing an income tax cut for most households.

A quick look at the main U.S. economic indicators under Trump and Biden shows the root of dissatisfaction in recent years. The latter’s presidency saw significantly higher inflation and hampered household purchasing power growth. From February 2021, the first full month of the outgoing president’s office, to September 2024, consumer prices in the U.S. grew at an average annual rate of 4.4%. During this period, the price level increased by almost 16%. During Trump’s four-year term (from February 2017 to January 2021), inflation averaged 1.5%, with the price level rising only 6.6%.

As a result, the median (middle) U.S. household income in 2020 (the last full year of Trump's presidency) was 8% higher in real terms than in 2015, despite a decline in the pandemic year of 2020. Under Biden’s administration, real income also grew but to a much lesser extent. By the end of 2023 (not accounting for a better 2024 in this regard), it was only 1.3% higher than in 2020.

The Democratic staff argues that while Biden's administration had to combat high inflation, the phenomenon had little to do with its decisions. The energy shock associated with Russia's attack on Ukraine, the consumption rebound after the COVID-19 pandemic, and supply chain disruptions contributed the most to rising prices. This consumption boom, coinciding with a restricted supply of goods, was partly due to the anti-crisis policies of the Trump administration in 2020, particularly cash transfers to households. Although Biden's administration tried to stimulate the economy, it did not prevent the Fed from quelling inflation.

From the perspective of consumers (and voters), the discussion about the causes of inflation is secondary. The fact is that under Trump, incomes grew faster than under Biden, even though there was a clear improvement in the U.S. labor market during Biden’s term. Recently, U.S. employment growth slowed, yet the number of non-farm jobs in October 2024 was 16 million greater than in January 2021 (these are seasonally adjusted data, meaning they are comparable across different months). Employment under Trump's administration decreased by nearly 3 million people.

This comparison is somewhat unfair, as Trump’s presidency was marked by a drop in employment due to the economic paralysis of the pandemic in 2020, while Biden is credited with the employment rebound in 2021. Even without accounting for these disruptions, the Democratic president’s tenure was more successful in this respect than the Republican’s. From the beginning of Trump’s presidency to the end of 2019, the number of non-farm workers increased by almost 6 million, over 7 million more than at the end of 2019.

Paradoxically, if American voters choose Trump over Harris, mainly remembering the high inflation under Biden, they might be jumping from the frying pan into the fire. Economists generally agree that a return of the Republican candidate to the White House could spike inflation further. This, in turn, would limit consumer demand and lead to more restrictive monetary policy, potentially hindering economic growth. In extreme scenarios, the U.S. might face stagflation.

Forecasts are few and imprecise, as the extent to which the future president can implement his promises depends on the balance of power in Congress. Elections for both houses of Congress (with one-third of Senate seats) coincide with the presidential elections. Consequently, economists typically offer variant forecasts: how their baseline scenario might change depending on which program parts are implemented and to what extent. The clarity of these forecasts is hindered by the fact that basic scenarios already rely on some assumptions about the incoming administration’s economic policy.

For instance, economists from Rabobank assume a divided Congress following the elections, similar to today, with one chamber dominated by Republicans and the other by Democrats. This distribution limits the president's fiscal maneuverability while allowing some freedom in trade policy. Under these assumptions, trade policy significantly influences the economic outlook, depending on who occupies the White House.

Rabobank economists predict that if Trump wins, U.S. inflation over the next two years (2025/26) will average 3.6%, compared to 2.6% if Harris wins. This would influence the Federal Reserve’s stance.

In the first scenario, the Fed's main rate at the end of 2026 would be 4.25%, compared to its current 5%, and in the second scenario, 3.5%. This would, in turn, impact U.S. economic growth. Under Trump, U.S. GDP will increase by 1.7% in 2025, 1.2% the following year, and 1.9% in 2027. Under Harris, growth would be 1.9%, 1.9%, and 2.1%. It would, therefore, be 0.4 percentage points higher on average, although still relatively low historically. As analysts from the Dutch bank explain, this is a consequence of the Democratic candidate’s promise to raise taxes on companies, which would stifle investment growth.

However, the authors of this forecast emphasized a lower import tariff increase than Trump declared. The minimum universal tariff rate (affecting all trading partners and goods) would rise to 5% instead of the 10-20% range. Currently, the U.S. does not apply such a rate, but the average import duty rate is 3%. If the minimum duty were 10%, Rabobank economists estimate inflation in 2026 could average 5.4% instead of 4%. This illustrates the significant impact of trade policy details.

Aside from a minimum tariff hike, Trump pledges a radical increase in tariffs on goods imported from China, up to 60% or even 100% in some instances—such as the existing rates on electric cars. While proposing selective tariff increases on Chinese goods, Kamala Harris's team argues that her opponent’s strategies would effectively tax American consumers. Economists’ estimates appear to support this. For instance, analysts from Capital Economics believe that Trump’s trade policy ideas would push inflation up by 2 percentage points almost overnight.

Nevertheless, trade policy is not the only reason economists expect inflation to escalate under Trump. The decisive reduction in immigrant inflow and fiscal policy changes also contribute to this expectation. Although Trump formally expresses concern for U.S. public finances, his tax and spending plans would likely deepen the deficit and increase national debt significantly. Harris's fiscal policy would also be expansive but to a lesser degree.

According to the Committee for a Responsible Federal Budget, implementing Trump's promises, such as maintaining the temporary individual income tax cut from 2017 and reducing the domestic corporate tax rate from 21% to 15%, could, in extreme cases, raise U.S. public debt to $15.5 trillion by 2035, up from about $36 trillion today. This would translate to an increase from nearly 100% of GDP to approximately 160% of GDP.

For comparison, simulations by the Congressional Budget Office suggest that maintaining current legal status would increase debt over this period to 125% of GDP (reference to net debt, excluding those parts held by public entities). Considering such liabilities, U.S. public debt already exceeds 120% of GDP.

In the most probable scenario, considering political and market barriers to such debt increases, U.S. government liabilities could rise to 143% of GDP by 2035.

Kamala Harris proposes increasing the corporate profit tax to 28% and imposing higher levies on affluent individuals. Simultaneously, she plans to maintain or expand the household tax cuts for those earning up to $400,000 annually, which Trump introduced. Economists from Goldman Sachs predict her program would slightly accelerate employment growth compared to Trump’s, thereby increasing the tax base.

However, import tariff increases would not compensate for the budget’s revenue shortfall. In the extreme scenario, Harris's proposals would lead to a U.S. public debt increase to 144% of GDP and, in the most probable scenario, to 134% of GDP.

Based on prevailing economic forecasts, Trump’s broad economic policies could negatively impact the economy more than Harris's and be more costly.