(Editor's note: The views expressed here are those of S&P Global's U.S. chief economist. While these views can help to inform the ratings process, sovereign and other ratings are based on the decisions of ratings committees, exercising their analytical judgment in accordance with publicly available ratings criteria.)
With Election Day approaching, Americans will make a decision that S&P Global Ratings believes could have monumental consequences for the U.S. and the world. In this light, we give a sense of what we think the effects of the two major-party presidential candidates' economic plans could be both now and in the foreseeable future on the world's biggest economy.
Given that the proposals from Democratic nominee Hillary Clinton and Republican candidate Donald Trump are preliminary, our analysis uses only what has been provided by campaigns. Because the candidates' plans lack many details, we are looking at possible effects over the next four years. To the extent that a proposal has changed, we've tried to account for this. Even proposals that have far-reaching support will likely take some time to implement, with little changing until 2018, at the earliest.
Regardless of who is elected, the new President will have to work closely with Congress to bring his or her proposals to fruition. At best, this will require compromise; at worst, it will end in gridlock. Indeed, history shows that very few candidates' pledges make it into law as originally shaped.
It's worth bearing in mind that Congress, too, is up for grabs. While the Republicans currently have a majority in both the House of Representatives and the Senate, a number of lawmakers find themselves in tight races, according to the Cook Political Report (as of Sept. 30, 2016). How successful the new president will be in pushing through proposals depends on how Congress shapes up.
And while any new administration will try to put its stamp on the next four (or eight) years beyond purely economic issues, we have focused on a few key areas that would have a large effect on the economy. These include fiscal issues, such as taxation and spending (including that on infrastructure), trade, immigration, and the minimum wage.
The Fiscal Story
Mr. Trump has said he plans to lower taxes in a number of ways, including collapsing the current seven federal income-tax brackets to three, with lower rates. His proposals would do this while repealing the alternative minimum tax and reducing the corporate tax rate to 15% from today's 35%. (One of his early proposals reportedly would have diminished federal tax revenues by more than $10 trillion; his later proposal would do so by a smaller $5.8 trillion), according to the Committee for a Responsible Federal Budget (CRFB). The national debt is currently over $14 trillion, or near 77% of GDP, and the CRFB estimates that Trump's plan would add an additional $5.3 trillion over the next decade. Mr. Trump argues that lower taxes would boost private-sector incentives.
Mr. Trump's plan favors high earners, with the top 1% getting about 47% of the tax cuts, according to the Tax Policy Center. Compared with the middle class and poorer Americans, high-income households save a greater portion of their income than they spend. Therefore, the effect on overall consumer spending would likely be less than if a tax cut was targeted to low-income households, who historically spend more of what they receive.
The Clinton campaign proposes to raise more than $1.4 trillion in federal receipts over the next decade, largely from top earners, with a surcharge on the adjusted gross income, limits on deductions, and increased levies on capital gains. While some have argued that Mrs. Clinton's plan could weigh on private-sector incentives, 75% of the higher taxes would be on high-income individuals, and 25% would be on estate taxes and corporate tax revenues, which would reduce the negative effects on private spending. In our view, a tax policy focused primarily on higher taxes for wealthier Americans, combined with potentially stronger immigration, would support near-term GDP growth.
Both candidates embrace infrastructure spending, which we see as a positive to long-run growth. Mrs. Clinton plans to spend $1.65 trillion over the next decade on infrastructure, expanding the Affordable Care Act and paid family leave. She also plans to reduce costs to attend public colleges and universities, address the student debt burden, and support earlier-childhood education. Mr. Trump supports infrastructure spending (he said that he would double her proposal) and also vowed to increase defense spending and child care assistance, while stopping cuts to Medicare, Medicaid, and Social Security. However, the revenues potentially lost to the government from his proposed tax cuts would likely mean either less money for the government to spend or a widening federal budget gap.
According to the CRFB, Clinton plans to increase government spending, with an emphasis on infrastructure investment financed through higher taxes on the wealthy. The infrastructure investment portion would support growth and economic activity long after projects have been completed, in our view. Even so, according to the CRFB, Clinton's plans would still increase the national debt by $200 billion above levels mandated under current law by 2026. The CRFB notes that neither presidential candidate has a plan to address the debt held by the public, and the CRFB estimates that the national debt would likely rise to above 86% of GDP under Clinton and 105% under Trump.
As we noted in our 2015 report, the "multiplier effect" of infrastructure investment on the economy is well understood (see "Global Infrastructure Investment: Timing Is Everything (And Now Is The Time)," published Jan. 13, 2015, on RatingsDirect). S&P Global Ratings economists estimated in 2015 that, under certain conditions, every dollar of investment in infrastructure could add as much as $1.70 to GDP in just a few years, depending on the state of an economy (multipliers tend to be lower in a strong economy and higher in a stagnant or struggling one).
Both candidates' trade platforms have taken a protectionist view. Each has rejected the proposed 12-nation Trans-Pacific Partnership (TPP) that President Obama hopes to make a signature achievement of his second term and criticized the North American Free Trade Agreement (NAFTA). However, as Secretary of State, Mrs. Clinton initially supported the TPP, but has since criticized it and pledged not to sign the agreement, now saying that any new trade measure has to pass two tests: protect American jobs and strengthen our national security.
Watching both candidates distance themselves from trade agreements is somewhat odd, given Republicans have traditionally supported free trade and President Bill Clinton signed NAFTA into law (though it was negotiated by his predecessor, President George H.W. Bush). At the same time, most estimates suggest that TPP would have only a modest effect on the U.S. economy, either positive or negative.
Still, the ongoing-but-sluggish economic recovery (the slowest in at least 50 years) has only recently brought about stronger job gains and a pickup in wages. This may help to explain the often hostile response to free-trade proposals as Americans remain concerned about the prospect of losing more jobs overseas, setting aside the benefits U.S. consumers would see in the form of more product choices at lower prices--which would help lower-income households most. And while both candidates have moved away from freer global trade, Mr. Trump has taken a much harder line than Mrs. Clinton.
The GOP nominee has called for tariffs of 45% for China and 35% for Mexico--which means that American consumers now paying $100 for an import from either of those countries could pay $145 and $135, respectively. Mr. Trump has also said he would punish U.S. companies that move production overseas. (Currently, the U.S. doesn't impose any tariffs on Mexican imports, keeping in terms of the NAFTA. While some Chinese goods such as steel are subject to import tariffs, the trade-weighted average import tariff is about 2% on industrial goods, according to the Office of U.S. Trade Representatives.)
Mrs. Clinton said that "we have to have a trade agreement that would create American jobs, raise wages and advance our national security" and that TPP won't meet the "high bar" she has set. She favors reauthorizing the U.S. Export-Import Bank and has said that she would offer tax incentives to companies that build production facilities at home.
In our view, the cost of increased isolationism would far outweigh the benefits of protecting American businesses in such a manner. In other words, if each country specializes in a good where it has a comparative advantage and trades for the rest, both world production and consumption improves. From an economic standpoint, with regard to Mr. Trump's stance, a number of proposals are unlikely to reach implementation, either because of legal reasons or a lack of political support. Nonetheless, a provision of the Trade Act of 1974 gives the president the fast track authority "to retaliate (with selected protection) against any country found to maintain unfair, unreasonable, or discriminatory practices that restrict U.S. exports." Any action along these lines increases the risk of a broader trade war, which we think would have dire economic consequences for the U.S. and the world.
In contrast to their stances on trade, the two major-party candidates' positions on immigration are clearly on opposite sides.
Mrs. Clinton aims to push immigration reform that would create a path to citizenship for most undocumented workers in the U.S. that will be introduced as part of a comprehensive immigration reform "within her first 100 days in office."
Mrs. Clinton's proposal has so far largely focused on a path to citizenship. She has also said that she wants a "truly comprehensive" system for all kinds of immigrants, including highly skilled workers. The Democratic nominee has reportedly said she doesn't want to "mix" comprehensive immigration reform with "other kinds of changes in visas and other concerns that particularly high-value technical companies have," noting that "keeping pressure on them helps us resolve the bigger problem."
Mr. Trump's proposals on immigration include building a wall along the Mexican border and deporting millions of undocumented immigrants over a two-term presidency. Our previous analysis on U.S. immigration policy notes that, in addition to the cost of deportation, the effects of tighter immigration laws would be quite dramatic at a time when the country has a rapidly aging labor force. We think the mass deportation of undocumented workers would weaken already slow-growing U.S. productivity, and result in slower near-term economic growth.
Trump argues that the H-1B program--which offers non-immigrant Visas for specialized workers--costs Americans jobs and calls for raising the prevailing wage paid to H-1Bs. He says this could help push companies to give these coveted entry-level jobs to the existing domestic pool of unemployed native and immigrant workers in the U.S. instead of flying in cheaper workers from overseas.
Workers coming to the U.S. on H-1B visas are often working in specialized, science, technology, engineering, and math (STEM) research jobs, which are considered very difficult to fill. And while immigrants will overlap at times, we found that they often fit into the labor force in areas and occupations where there are insufficient numbers of comparable native workers, both for high- and low-skilled occupations. In other words, they are largely complements, not substitutes, to the American workforce. So, if H-1B visas are issued to fill jobs that are difficult to fill by American workers, then raising the wage requirement for H-1Bs wouldn't encourage the hiring of American workers. It would probably just raise business labor costs for those H-1B workers.
Immigrants also spend their money on goods and services in the U.S. and are much more likely to file a patent than U.S.-born citizens. They are often highly entrepreneurial; they are reportedly 30% more likely to start a new business than U.S.-born citizens, which in turn, creates more jobs. That spells more revenue, more jobs, and more growth.
All told, we believe immigration reform that has an employment-based focus would be a positive for the U.S. economy. In 2014, we estimated that employment-based immigration reform could add about 3.2 percentage points to real GDP in 10 years. Generally, highly skilled workers earn much more than average U.S. wages, with those in the STEM fields earning almost twice the average. And because the top 20% of high earners account for 38% of all spending, the benefits are clear.
Moreover, a younger workforce makes for more tax revenue. If, as we estimated, immigration reform boosts economic expansion by an additional 3.2 percentage points in the first decade--and likely even more in the next--tax revenues would also increase. At the same time, the cumulative federal deficit would shrink by about $150 billion in real terms over the 10-year period and likely even more in the second decade.
The Minimum Wage
As with immigration, the candidates' positions on the federal minimum wage also contrast sharply. Mr. Trump initially opposed any increase in the minimum wage but has since expressed interest in increasing it. Alternatively, the Democratic platform supports more than doubling the minimum wage, to $15 an hour from the current $7.25--a position Mrs. Clinton now supports after earlier favoring an increase to $12. She has also been vague about how quickly to raise the wage, saying only it would be "over time."
S&P Global Ratings' view is that disadvantaged workers--those with lower productivity or weak bargaining power--are in increasing danger of being left behind while the economic recovery continues to unfold. This is because the minimum wage is failing to meet at least one of its goals: to augment purchasing power of low-wage workers.
Certainly, the cost for many industries of higher wages can be significant. Even while we would likely see no immediate effects on the credit quality of, for example, the U.S. retailers and restaurants we rate, their profitability could be hurt. This would be due to the fact that wages and employee benefits can account for upwards of one-third of their costs.
Either way, we think the conditions are favorable for a hike in the federal minimum wage. Given its current comparatively low level and our view that the business cycle isn't in a downturn or the initial stages of a recovery, businesses shouldn't have more difficulty digesting the extra cost. On top of that, recent empirical evidence suggests that the main argument for holding the wage where it is--that there would be massive job losses as a result--doesn't seem to hold water.
The End Result
To be sure, the broadest and deepest effects of the new president's tenure won't be confined to the prospects for GDP growth. In fact, other concerns may take more immediate precedence given our status in the world. Still, we do think economic concerns are an important factor in what will occur on Nov. 8.
Increased government spending, with an emphasis on infrastructure investment, something that both candidates support, would likely boost growth and economic activity long after projects have been completed, in our view. Additionally, we think longer-run growth would be a bit stronger under a President Clinton, given her immigration plan. And while both candidates have signaled a more protectionist platform on trade, Mr. Trump's position would likely be more damaging to growth than Mrs. Clinton.
That said, we believe that our governmental system of checks and balances (and, very often, outright obstructionism) means that change will occur only slowly. Even well-supported plans take time to implement. Much work lies ahead for any new president, who will have to garner support from those in their parties and across the aisle. In this light, perhaps the only certainty is that the proposals we've looked at here will look very little like they do now, should they become law.